N.K. Proteins Ltd., Ahmedabad V. The ACIT.,Range-5, Ahmedabad

ITA 1986/AHD/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 1047 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 10 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-07-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 10-06-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 05-09-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: S N SOPARKAR
• Keywords: Depreciation; Opportunity of being heard; Earning of tax free income; Question of law; Non compliance; Commercial expediency
• Section: 143(3); 14A; 115JB; 194C; 32; 37; 28; 139

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH AHMEDABAD BEFORE SHRI RAJPAL YADAV, JM, & SHRI MANISH BORA D, AM. ITA NO.1986/AHD/2012 ASST. YEAR: 2009-10 N. K. PROTEINS LTD., 9 TH FLOOR POPULAR HOUSE, ASHRAM ROAD, AHMEDABAD. VS. ADDL. CIT, RANGE-5, AHMEDABAD. APPELLANT RESPONDENT PAN AAACN 9377N AND ITA NO.2133/AHD/2012 ASST. YEAR: 2009-10 ADDL. CIT, RANGE-5, AHMEDABAD. VS. N. K. PROTEINS LTD., 9 TH FLOOR POPULAR HOUSE, ASHRAM ROAD, AHMEDABAD. APPELLANT RESPONDENT APPELLANT BY SHRI S. N. SOPARKAR, AR RESPONDENT BY SHRI PRASOON KABRA, SR.DR DATE OF HEARING: 10/6/2016 DATE OF PRONOUNCEMENT: 27/7/2016 O R D E R PER MANISH BORAD, ACCOUNTANT MEMBER . THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER OF LD. CIT(A)-XI, AHMEDABAD DATED 26.7.2012 IN APPEAL NO.C IT(A)- XI/368/ADDL.CIT.R-5/11-12, PASSED AGAINST ORDER U/S 143(3) OF THE IT ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 2 ACT, 1961 (IN SHORT THE ACT) FOR ASST. YEAR 2009-10 ON 29.12.2011 BY ADDL. CIT, RANGE-5, AHMEDABAD. FOLLOWING GROUNDS HA VE BEEN RAISED IN THESE APPEALS :- 2. ITA NO.1986/AHD/2012 FOR ASST. YEAR 2009-10 (ASS ESSEES APPEAL): GROUNDS OF APPEAL RAISED :- 1. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE DISA LLOWANCE OF 14,40,000 UNDER SECTION 40(A)(IA) IN THE ABSENCE OF DETAILS. 2. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE D ISALLOWANCE OF DEPRECIATION OF RS. 16,83,501 ON FIVE TANKERS ON THE GROUND THAT THEY ARE NOT USED FOR BUSINESS IN AS MUCH AS ALL THE FIVE TANKERS HAVE BE EN HIRED TO N.K. ROADWAYS P. LTD. AND THAT THE SAID COMPANY HAS IN FACT USED THE TANKERS AS PER EVIDENCE FURNISHED AND THAT THE HIRE CHARGES WAS NOT CHARGED THROUGH OVERSIGHT WHICH WAS OFFERED VOLUNTARILY FOR TAXATION. 2.1 THE APPELLANT SAYS AND SUBMITS THAT THE LEARNED CIT(A) IS NOT CORRECT IN OBSERVING THAT THE EVIDENCES FURNISHED ARE INTERNAL . IN FACT, THE EVIDENCES FURNISHED ARE FROM N.K. ROADWAYS P. LTD. WHICH IS S EPARATE COMPANY. 2.2 THE APPELLANT SAYS AND SUBMITS THAT THE DISALLO WANCE IS ON PRESUMPTION AND CONJUNCTURE. 3. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE D ISALLOWANCE OF DEPRECIATION OF RS.4,64,850 ON PLANT & MACHINERY AND ELECTRICAL INSTALLATION OF RS. 30,99,000 ON THE GROUND THAT IT IS INCLUDED IN WORK IN PROGRESS AS STATED BY WAY OF NOTE IN AUDITORS REPORT IN FORM NO. 3CD IN A S MUCH AS THE WIP OF RS. 138.49 LACS IN THE OPENING .BALANCE WHICH IS INCLUD ED IN THE PLANT & MACHINERY AND ELECTRICAL INSTALLATION AND THE SAID ASSETS HAV E BEEN USED DURING A.Y. 2009- 2010 AS PER THE DETAILS PROVIDED IN THE CHART OF DE PRECIATION. 4. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE D ISALLOWANCE OF RS. 1,13,521 UNDER SECTION 14A IN AS MUCH AS THE INVESTMENT IS MADE OU T OF INTEREST FREE FUNDS AND THAT # THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE ON IN VESTMENTS. 4.1 THE APPELLANT SAYS AND SUBMITS THAT ONLY T RANSACTION IS THE PURCHASE OF SHARES WORTH RS. 17,85,000 OF N.K. INDUSTRIES LTD. [NKIL] DURING THE WHOLE YEAR, THEREFORE THE QUESTION OF DISALLOWING ANY EXPENDITURE DOES NOT A RISE SINCE THERE IS NO EXPENDITURE INCURRED THEREFORE. ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 3 5. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE DISA LLOWANCE OF RS. 56,000 BEING THE PROVISION FOR DIMINUTION IN ASSETS IN AS MUCH AS IT IS ALLOWABLE AS DEDUCTION FOLLOWING THE SUPREME COURT DECISION IN THE CASE OF VIJYA BAN K 323 ITR 166 3. BRIEFLY STATED FACTS OF THE CASE AS CULLED OUT F ROM THE RECORDS ARE THAT THE ASSESSEE IS A LIMITED COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING EDIBLE AND NON-EDIBLE OIL PRODUCTS . RETURN OF INCOME FOR ASST. YEAR 2009-10 WAS FILED ON 30.09.2009 DECL ARING TOTAL INCOME OF RA.19.40 CRORES (APPROXIMATELY) AND BOOK PROFIT U/S 115JB OF THE ACT AT RS.13.33 CRORES (APPEOXIMATELY). THE CASE WA S SELECTED FOR SCRUTINY ASSESSMENT AND NOTICE U/ 143(2) OF THE ACT WAS ISSUED ON 19.8.2010. VARIOUS INFORMATIONS WERE CALLED FOR AND DULY COMPLIED BY THE ASSESSEE. DURING THE COURSE OF ASSESSMENT PROCE EDINGS ASSESSEE VIDE ITS LETTER DATED 5.12.2011 FILED A RE VISED COMPUTATION OF INCOME DECLARING TOTAL INCOME AT RS.19.93 CRORES (APPROXIMATELY). AFTER MAKING VARIOUS ADDITIONS TOTALING TO RS.2,61, 94,422/- INCOME WAS ASSESSED AT RS.22,55,48,604/-. 4. IN APPEAL BEFORE LD. CIT(A) ASSESSEE GOT PART RE LIEF. NOW BOTH THE ASSESSEE AND REVENUE ARE IN APPEAL BEFORE THE T RIBUNAL. 5. FIRST WE TAKE UP ASSESSEES APPEAL IN ITA NO.198 6/AHD/2012 : GROUND NO.1 OF THIS APPEAL READ AS UNDER :- 1. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE DISA LLOWANCE OF 14,40,000/- UNDER SECTION 40(A)(IA) IN THE ABSENCE OF DETAILS. 6. DURING THE COURSE OF ASSESSMENT PROCEEDINGS LD. ASSESSING OFFICER DENIED THE CLAIM OF ASSESSEE OF RS.14,40,00 0/- AS ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 4 MISCELLANEOUS EXPENSES U/S 40(A)(IA) OF THE ACT. L D. AR SUBMITTED THAT PRIOR PERIOD EXPENDITURE OF RS.14.40 LACS WAS CLAIMED AS MISCELLANEOUS EXPENSES UNDER THE PROVISIONS OF SECT ION 40(A)(IA) OF THE ACT, AS THE IMPUGNED EXPENSES PERTAINED TO EARL IER YEARS NOT CLAIMED IN BOOKS IN THE YEAR OF INCURRENCE. DURING THE YEAR UNDER APPEAL INCOME-TAX DEDUCTED WAS DEPOSITED ON THESE PRIOR PERIOD EXPENSES AND THE MISCELLANEOUS EXPENDITURE OF RS.14 .40 LACS WAS CLAIMED AS DEDUCTION. HOWEVER, LD. CIT(A) CONFIRMED THE DISALLOWANCE ON THE BASIS OF HIS VIEW THAT IN THE A BSENCE OF SPECIFIC DETAIL OF THE MISCELLANEOUS EXPENSES IT IS HARD TO BELIEVE THAT THESE EXPENSES ATTRACTED TDS LIABILITY AND THESE IMPUGNED EXPENSES WERE NOT REQUIRED TO BE DISALLOWED AS PER SECTION 40(A)( IA) OF THE ACT IN THE FIRST INSTANT THE SAME CANNOT BE DISALLOWED IN THIS YEAR. 7. ON THE OTHER HAND, LD. DR SUPPORTED THE ORDERS O F LOWER AUTHORITIES. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. IN THIS GROUND THE ISSUE RELATES TO ALLO WABILITY OF DEDUCTION OF PRIOR PERIOD MISCELLANEOUS EXPENDITURE OF RS.14. 40 LACS WHICH HAVE BEEN CLAIMED IN THE YEAR OF APPEAL ON THE BASI S OF DEPOSITING DUE TDS AS PER THE PROVISIONS OF SECTION 40(A)(IA) PROVISO (I) WHICH READS AS UNDER :- [PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM, TA X HAS BEEN DEDUCTED IN ANY SUBSEQUENT YEAR, OR HAS BEEN DEDUCTED DURING THE PR EVIOUS YEAR BUT PAID AFTER THE DUE DATE SPECIFIED IN SUB-SECTION (1) OF SECTIO N 139, SUCH SUM SHALL BE ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 5 ALLOWED AS A DEDUCTION IN COMPUTING THE INCOME OF T HE PREVIOUS YEAR IN WHICH SUCH TAX HAS BEEN PAID:] 9. FROM GOING THROUGH THE SUBMISSIONS OF LD. AR WE UNDERSTAND THAT THE ONLY REASON FOR WHICH LD. ASSESSING OFFICE R HAS NOT ALLOWED THE DEDUCTION THAT THERE IS NO RECORD ABOUT THE TYP E OF EXPENDITURE OF RS.14.40 LACS AS THE SAME HAS BEEN MENTIONED AS MIS CELLANEOUS EXPENSES AND IF AN EXPENDITURE ON WHICH TDS IS NOT REQUIRED TO BE DEDUCTED THEN SUCH EXPENSES CANNOT BE ALLOWED IN TH IS YEAR AS THEY PERTAINED TO EARLIER YEARS. 10. WE ARE, THEREFORE, OF THE VIEW THAT THIS ISSUE NEEDS TO BE SET ASIDE TO THE FILE OF ASSESSING OFFICER BEFORE WHOM NECESSARY DETAILS WILL BE SUPPLIED BY THE ASSESSEE SHOWING THE TYPE O F EXPENDITURE, YEAR OF INCURRING SUCH EXPENDITURE AND PROVISIONS OF TDS APPLICABLE ON THIS EXPENDITURE WAS INCURRED. IF ON EXAMINING T HE ABOVE DETAILS ASSESSING OFFICER IS SATISFIED THAT THIS IMPUGNED E XPENDITURE AT RS.14.40 LACS WERE ALLOWABLE IN THE YEAR IN WHICH T HEY WERE SPENT SUBJECT TO DEDUCTION OF TDS THEN THE SAME SHOULD BE ALLOWED IN THE YEAR UNDER APPEAL AFTER VERIFYING THAT THE TDS HAS BEEN PAID. NEEDLESS TO MENTION THAT ASSESSEE SHOULD BE PROVIDE D SUFFICIENT OPPORTUNITY OF BEING HEARD ON THE ISSUE. THIS GROUN D IS ALLOWED FOR STATISTICAL PURPOSES. 11. GROUND NO.2 OF THE APPEAL READS AS UNDER :- 2. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE D ISALLOWANCE OF DEPRECIATION OF RS. 16,83,501 ON FIVE TANKERS ON THE GROUND THAT THEY ARE NOT USED FOR BUSINESS IN AS MUCH AS ALL THE FIVE TANKERS HAVE BE EN HIRED TO N.K. ROADWAYS ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 6 P. LTD. AND THAT THE SAID COMPANY HAS IN FACT USED THE TANKERS AS PER EVIDENCE FURNISHED AND THAT THE HIRE CHARGES WAS NOT CHARGED THROUGH OVERSIGHT WHICH WAS OFFERED VOLUNTARILY FOR TAXATION. 2.1 THE APPELLANT SAYS AND SUBMITS THAT THE LEARNED CIT(A) IS NOT CORRECT IN OBSERVING THAT THE EVIDENCES FURNISHED ARE INTERNAL . IN FACT, THE EVIDENCES FURNISHED ARE FROM N.K. ROADWAYS P. LTD. WHICH IS S EPARATE COMPANY. 2.2 THE APPELLANT SAYS AND SUBMITS THAT THE DISALLO WANCE IS ON PRESUMPTION AND CONJUNCTURE. 12. DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS OBSERVED BY ASSESSING OFFICER THAT DEPRECIATION OF RS.16,83, 501/- WAS CLAIMED ON PURCHASE OF 5 TRUCKS (TANKERS) FOR A TOTAL COST OF RS.67,34,444/- AND WERE PUT TO USE ON 31.3.2009 I.E. AT THE END OF THE YEAR. LD. ASSESSING OFFICER FURTHER OBSERVED THAT VARIOUS DOC UMENTS PROVIDED BY ASSESSEE TO PROVE THAT ASSETS WERE PUT TO USE DU RING ASST. YEAR 2009-10 WERE INTERNAL EVIDENCES ONLY WHICH INCLUDED SUPPLEMENTARY MEMORANDUM OF UNDERSTANDING BETWEEN THE ASSESSEE AN D N. K. ROADWAYS, CONSOLIDATED BILLS WERE RAISED TO N. K. R OADWAYS FOR FUEL CHARGES AND ALSO THE PROOF OF HIRE CHARGES INCOME W HICH WAS DECLARED BY ASSESSEE DURING THE COURSE OF ASSESSMEN T PROCEEDINGS. ASSESSING OFFICER WAS NOT SATISFIED WITH THESE PROO FS OF USE OF THE ASSETS AND DISALLOWED DEPRECIATION ON THESE 5 TRUCK S AT RS.16,83,501/-. 13. WHEN THE ISSUE CAME UP BEFORE LD. CIT(A), THE G ROUND WAS DISMISSED BY LD. CIT(A) BY OBSERVING AS UNDER :- 4.3 I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMIS SIONS. I HAVE ALSO PERUSED VARIOUS EVIDENCES FURNISHED BY THE APPELLANT DURING THE APPELLATE PROCEEDINGS. IT IS SEEN THAT THE APPELLANT IS PLACING HEAVY RELIANC E ON THE RC BOOKS OF THE FIVE ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 7 TRUCKS IN QUESTION WHICH INDICATE THAT THESE TRUCKS WERE REGISTERED ON OR BEFORE 31/3/2009. TO PROVE THE FACT THAT THESE TRUCKS WERE USED FOR THE PURPOSES OF BUSINESS, THE APPELLANT IS PLACING RELIANCE ON THE DIESEL BILLS RAISED BY N.K. ROADWAYS PVT. LTD. THE APPELLANT HAS ALSO PLACED RE LIANCE ON SUPPLEMENTARY MOU ENTERED WITH M/S.N.K. ROADWAYS PVT. LTD. WHEREI N THESE TRUCKS WERE SHOWN AS HIRED TO M/S. N.K. ROADWAYS PVT. LTD. THE APPELLANT HAS ALSO OFFERED HIRE CHARGES OF RS. 31.936/- FOR THE PURPOSE OF TAX ATION, WHICH WAS RECEIVED FROM M/S. N.K. ROADWAYS PVT. LTD. BUT THE SAME WAS NOT D ECLARED AS INCOME IN THE ACCOUNTS OF THE APPELLANT BY OVERSIGHT. TAKING ENTI RETY OF THE FACTS IN VIEW, I AM OF THE CONSIDERED VIEW THAT THE APPELLANT HAS FAILE D TO MAKE A FOOL PROOF CASE AS FAR AS THE BUSINESS USE OF TRUCKS IS CONCERNED. IT IS A MATTER OF RECORD THAT M/S. N.K, ROADWAYS PVT. LTD. IS A SISTER CONCERN, WHICH IS ENGAGED IN TRANSPORTATION BUSINESS. MAKING CONVENIENT ENTRIES IN THE BOOKS OF ACCOUNTS OF M/S. N.K. ROADWAYS PVT. LTD. TOWARDS THE DIESEL EXPENSES IS N OT DIFFICULT. OTHERWISE ALSO, IN THE NORMAL COURSE OF BUSINESS N.K. ROADWAYS PVT. LTD. IS PURCHASING DIESEL ON DAY TODAY BASIS. THIS WAY THE EVIDENCE FURNISHED BY THE APPELLANT TOWARDS THE PURCHASE OF DIESEL DOES NOT PROVE THE FACT THAT THE TRUCKS-WERE USED FOR THE PURPOSE OF BUSINESS. THE MERE PURCHASE OF DIESEL DO ES NOT CONCLUSIVELY PROVES THAT THE TRUCKS WERE USED FOR THE PURPOSE OF BUSINE SS AS THE TRUCKS MAY BE IDLE EVEN AFTER THE PURCHASE OF DIESEL. AS FAR AS PLYING THE TRUCKS FOR THE PURPOSE OF BUSINESS IS CONCERNED, THE APPELLANT HAS FILED VERY WEAK EVIDENCES. IT IS SEEN THAT THESE TRUCKS WERE NOT INCLUDED IN THE MAIN MEM ORANDUM OF UNDERSTANDING WITH M/S. N.K. ROADLINES PVT. LTD. THESE TRUCKS WER E HIRED OUT TO M/S. NX ROADLINES PVT. LTD. BY WAY OF A SUPPLEMENTARY AGREE MENT. IT IS ALSO A MATTER OF FACT THAT THE APPELLANT HAS NOT DECLARED ANY INCOME TOWARDS TRUCK HIRE CHARGES. DURING THE APPELLATE PROCEEDINGS THE APPELLANT SUBM ITTED THAT INCOME OF RS.31,936/- IS VOLUNTARILY DECLARED AS HIRE CHARGES . THE ABOVE MENTIONED FACTS MAKES THE CASE OF THE APPELLANT VERY WEAK AS THE AP PELLANT HAS PURCHASED THE TRUCKS TOWARDS THE FAG END OF THE YEAR, INTERNAL EV IDENCES TOWARDS DIESEL PURCHASE HAS BEEN FILED, THE TRUCKS WERE LEASED OUT TO M/S. N.K.ROADLINES PVT. LTD. THROUGH A SUPPLEMENTARY MEMORANDUM OF UNDERSTA NDING AND THE HIRE CHARGES STATEDLY EARNED BY PLYING THESE TRUCKS WERE NOT RECORDED IN THE BOOKS OF APPELLANT AND CONSEQUENTLY NOT DECLARED TO TAX. IN VIEW OF ABOVE FACTS, I AM INCLINED TO AGREE WITH THE CONTENTIONS OF THE LD. A .O. ACCORDINGLY, DISALLOWANCE OF RS. 16.83.501/- AGAINST DEPRECIATION ON TRUCKS I S CONFIRMED. THIS GROUND OF APPEAL IS DISMISSED. 14. AGGRIEVED, ASSESSEE IS NOW IN APPEAL BEFORE THE TRIBUNAL. 15. LD. AR SUBMITTED THAT ALL THESE 5 TRUCKS WERE P URCHASED ON 27.3.2009 AND HIRED TO M/S N. K. ROADWAYS. FURTHER ASSESSING OFFICER HAS MENTIONED THAT ONLY INTERNAL EVIDENCES WERE PROVIDED TO ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 8 PROVE THAT ASSETS WERE PUT TO USE IN THE YEAR, WAS NOT CORRECT BECAUSE ASSESSEE HAS PLACED ON RECORD COPY OF PURCH ASE BILL, GOODS CARRIAGE PERMIT ISSUED BY REGIONAL TRANSPORT OFFICE , INSURANCE OF VEHICLE, CERTIFICATE OF FITNESS AND COPY OF RC BOOK ON FORM NO.23 ALONG WITH POLLUTION UNDER CONTROL (PUC) CERTIFICAT E. ALL THESE EVIDENCES ARE EXTERNAL EVIDENCES AND THE FACT HAS R EPEATEDLY COMING OUT FROM EXTERNAL EVIDENCES THAT ASSETS WERE PURCHA SED AND PUT TO USE DURING ASST. YEAR 2009-10 ONLY AND, THEREFORE, DEPRECIATION IS ALLOWABLE ON THE SAME. LD. AR RELIED ON THE JUDGMEN TS OF HON. JURISDICTIONAL HIGH COURT IN THE CASE OF ACIT VS. A SIMA SYNTEX (2001) 251 ITR 133 (GUJ), CIT VS. PINNACLE FINANCE LTD. 26 8 ITR 395 (GUJ) AND CIT VS. UTI BANK LTD. 319 ITR 357 (GUJ). 16. ON THE OTHER HAND LD. DR SUPPORTED THE ORDERS O F LOWER AUTHORITIES. 17. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THROUGH THIS GROUND ASSESSEE HAS CHALLEN GED THE ORDER OF LD. CIT(A) CONFIRMING THE DISALLOWANCE ON DEPRECIAT ION OF RS.16,83,501/- ON 5 TANKERS ON THE GROUND THAT THEY WERE NOT PUT TO USE FOR BUSINESS PURPOSES BEFORE THE CLOSE OF THE Y EAR. FROM GOING THROUGH THE PAGES 99 TO 131 OF THE PAPAR BOOK DATED 6.11.2015 WE FIND THAT ASSESSEE HAS PLACED COPIES OF GOODS CARRI AGE PERMIT, VEHICLE INSURANCE, CERTIFICATE OF FITNESS, CERTIFIC ATE OF REGISTRATION AND PUCC FOR ALL THE 5 TRUCKS WHICH SHOW THAT ALL THE 5 VEHICLES WERE OWNED BY ASSESSEE AND WERE READY TO USE. AS FAR AS ASSETS BEING ACTUALLY USED WE OBSERVE THAT ON PAGES 11 TO 98 OF THE PAPER BOOK ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 9 DATED 6.11.2015 EXHIBITING INVOICE NO.140 DATED 31 .3.2009 ISSUED BY N. K. PROTEINS TO M/S N/ K. ROADWAYS LTD. FOR FUEL CHARGES. IT IS PERTINENT TO NOW THAT ASSESSEE ENTERED MEMORANDUM O F UNDERSTANDING ON 31.3.2008 WITH M/S N/ K. ROADWAYS ON HIRING VARIOUS COMMERCIAL VEHICLES OWNED BY ASSESSEE WHICH ARE EXHIBITED AT ANNEXURE-A OF THE PAPER BOOK. THERE IS NO DISPU TE RAISED BY REVENUE IN REGARD TO DEPRECIATION IN RESPECT OF THE SE VEHICLES. FURTHER SUPPLEMENTARY DEED TO THE MEMORANDUM OF UND ERSTANDING DATED 31.3.2008 WAS EXECUTED ON 15 TH NOVEMBER, 2008 WHEREIN ASSESSEE AGREED FOR GIVING ON HIRE THE TRUCKS OR TA NKERS PURCHASED BY IT DURING FINANCIAL YEAR 2008-09. IMPUGNED 5 TRU CKS WHICH WERE PURCHASED ON 27.3.2009 AND WERE READY TO USE ALSO F ORM PART ON THE SUPPLEMENTARY AGREEMENT. WE FURTHER OBSERVE THAT HO N. JURISDICTIONAL HIGH COURT IN THE CASE OF ACIT VS. A SIMA SYNTEX (SUPRA) HAS DEALT WITH SIMILAR ISSUE OF ALLOWABILIT Y OF DEPRECIATION WITH REGARD TO THE USE OF THE ASSET IN THE RELEVANT YEAR BY OBSERVING AS UNDER :- 43. WE ARE, THEREFORE, OF THE OPINION THAT WHEN TH ERE IS COMMENCEMENT OF THE BUSINESS BY WAY OF PRODUCTION OF THE ARTICLES, IT C AN BE SAID THAT THE ASSESSEE IS ENTITLED TO DEPRECIATION. 44. IT IS REQUIRED TO BE NOTED THAT WHEN AN ENTREPR ENEUR UNDERTAKES TO INVEST A HUGE AMOUNT FOR THE MANUFACTURE OF THE PRODUCT, BE HAS TO PLAN IT PROPERLY. INSTALLATION OF MACHINERY OR PLANT AND MACHINERY IN THE BUILDING ITSELF IS NOT SUFFICIENT TO ATTRACT THE PROVISIONS CONTAINED IN S ECTION 32OF THE ACT. THERE MUST BE USE OF PLANT AND MACHINERY FOR THE PURPOSE OF BU SINESS AS CONTEMPLATED IN SECTION 32 OF THE ACT. THERE IS THUS A THIN LINE BE TWEEN THE TRIAL RUN AND ACTUAL PRODUCTION, OR MANY A TIME, THE WORD USED IS 'COMME RCIAL PRODUCTION'. IF THE MACHINES ARE INSTALLED PROPERLY AND IT GIVES GOOD R ESULT, THEN ONE NEED NOT WAIT FOR ANY RECTIFICATION IN THE SYSTEM. THERE MAY BE S OME CASES WHEREIN AFTER COMMENCEMENT OF THE PRODUCTION, THE MACHINE MAY NOT GIVE PROPER RESULTS-MAY BE ON ACCOUNT OF FAILURE OF CERTAIN PARTS, MAY BE O N ACCOUNT OF REQUIREMENT OF CERTAIN ADDITIONAL MACHINERY, ETC. IN SUCH A CASE, THE PRODUCTION OBTAINED AT THE INITIAL STAGE WOULD BE CONSIDERED AS TRIAL PRODUCTI ON. IN THE INSTANT CASE, THERE IS ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 10 NOTHING TO INDICATE THAT THE ASSESSEE WAS REQUIRED TO INSTAL ANY ADDITIONAL PART OR MACHINERY WITH A VIEW TO RUN THE ENTIRE UNIT. IT IS NOT A CASE SIMILAR TO THAT CASE WHERE BEFORE THE BOMBAY HIGH COURT THERE WAS NO PRO DUCTION AND ONLY TOOLS WERE TESTED. THE PRESENT CASE IS NOT SIMILAR TO THA T OF SPECIALITY PAPER LTD. (1982] 133 ITR 879 (GUJ) (APPEX.) WHERE WET PRESS W AS REQUIRED TO BE INSTALLED AND EVEN THEREAFTER ADDITIONAL MACHINERY WAS REQUIR ED TO BE INSTALLED. IN THE INSTANT CASE, PLANT AND MACHINERY WERE INSTALLED AN D IT WORKED SMOOTHLY. THERE MAY BE CERTAIN MACHINES, WHICH IN VIEW OF THE LATES T TECHNOLOGY, REQUIRE NO TRIAL RUN. IF SEPARATE PARTS ARE FITTED AND THE MACHINE I S BROUGHT INTO EXISTENCE, IT MAY REQUIRE A TRIAL RUN, BUT IF MACHINERY IS IMPORTED A ND IT IS MERELY FIXED HERE, IT DOES NOT MEAN THAT THE MACHINE WOULD NOT WORK. ULTIMATEL Y, ON EVIDENCE, THE TRIBUNAL HAS FOUND THAT 2,68,412 MTRS. OF GREY CLOTH WAS MAN UFACTURED. 45. THE LAW DOES NOT REQUIRE THAT THERE MUST BE OPT IMUM PRODUCTION FOR GRANTING THE BENEFIT. LAW ONLY REQUIRES THAT THERE MUST BE U SE OF PLANT AND MACHINERY FOR THE PURPOSE OF BUSINESS. USE OF SUCH WORDS THAT PLA NT AND MACHINERY WAS RUN MORE EXTENSIVELY OR WAS REQUIRED TO BE USED FOR LAR GER PRODUCTION IS NOT TO BE FOUND IN THE ACT OR RULES. WHETHER THE PLANT AND MA CHINERY WERE UP TO THE EXTENT OF ITS EFFICIENCY IS IRRELEVANT FOR THE PURPOSE OF DECIDING DEPRECIATION. THE TEST IS THAT BUILDING, PLANT AND MACHINERY ARE USED FOR THE PURPOSE OF BUSINESS. IT IS NOT EVEN NECESSARY THAT IN A YEAR IT MUST HAVE BEEN USE D FORA PARTICULAR NUMBER OF DAYS. IF THE INTENTION OF THE LEGISLATURE WAS THAT IF THE PLANT AND MACHINERY IS USED FOR A PARTICULAR NUMBER OF DAYS, ONLY THEN ONE IS ENTITLED TO GET THE BENEFIT OF DEPRECIATION, THE LEGISLATURE WOULD HAVE MADE THAT PROVISION. EARLIER, RULES WERE TO THE AFORESAID EXTENT. EVEN RECENTLY, WITH REGARD TO DEPRECIATION OF VEHICLES, LAW IS MADE CLEAR. THEREFORE, IT IS FOR THE LEGISLATURE TO MAKE A PROVISION IN THAT REGARD. UNLESS AND UNTIL THAT PROVISION IS MADE, PL ANT, MACHINERY AND BUILDING USED FOR THE PURPOSE OF BUSINESS IN A PARTICULAR YE AR IRRESPECTIVE OF THE NUMBER OF DAYS FOR WHICH IT WORKED, AND IF WORKED FOR THE PUR POSE OF BUSINESS, WOULD ATTRACT THE PROVISIONS OF SECTION 32 OF THE ACT. 18. RESPECTFULLY FOLLOWING THE DECISION OF HON. JUR ISDICTIONAL HIGH COURT IN THE CASE OF ACIT VS. ASIMA SYNTEX (SUPRA) DISCUSSED ABOVE, WE ARE OF THE VIEW THAT AS THE ASSESSEE HAS PROVED BEYOND DOUBT THAT THE IMPUGNED ASSETS CONSISTING OF 5 TRUCKS PUR CHASED FOR RS.67,34,004/- SATISFY ALL THE CONDITIONS AS PROVID ED U/S 32 OF THE ACT AND, THEREFORE, ARE ELIGIBLE FOR DEPRECIATION FOR R S.16,83,501/-. ACCORDINGLY, THIS GROUND OF ASSESSEE IS ALLOWED. 19. GROUND NO.3 OF ASSESSEES APPEAL ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 11 3. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE D ISALLOWANCE OF DEPRECIATION OF RS.4,64,850 ON PLANT & MACHINERY AND ELECTRICAL INSTALLATION OF RS. 30,99,000 ON THE GROUND THAT IT IS INCLUDED IN WORK IN PROGRESS AS STATED BY WAY OF NOTE IN AUDITORS REPORT IN FORM NO. 3CD IN A S MUCH AS THE WIP OF RS. 138.49 LACS IN THE OPENING .BALANCE WHICH IS INCLUD ED IN THE PLANT & MACHINERY AND ELECTRICAL INSTALLATION AND THE SAID ASSETS HAV E BEEN USED DURING A.Y. 2009- 2010 AS PER THE DETAILS PROVIDED IN THE CHART OF DE PRECIATION. 20. ASSESSING OFFICER DISALLOWED DEPRECIATION OF RS .4,64,850/- ON PLANT AND MACHINERY AND ELECTRICAL INSTALLATION ON THE GROUND THAT AS PER THE AUDITORS REPORT THESE ITEMS WERE INCLUDED I N WORK-IN-PROGRESS AND, THEREFORE, NOT ELIGIBLE FOR DEPRECIATION. THIS ADDITION WAS CHALLENGED BEFORE LD. CIT(A) BUT ASSESSEE COULD NOT SUCCEED AS THE SAME WAS DISMISSED BY LD. CIT(A) BY OBSERVING AS UN DER :- 5.2 I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. IT IS SEEN THAT THE DEPRECIATION ON THE ADDITION TO PLANT & MACHINERY A ND ELECTRIC INSTALLATION OF RS.30.99 LACS HAS BEEN DISALLOWED ON THE BASIS OF A UDITORS OBSERVATION. IT IS CLEARLY MENTIONED BY THE A.O. THAT THE AUDITORS OBS ERVATION PERTAINS TO 31/3/2008. I HAVE PERUSED ANNEXURE-3 TO FORM NO.SCD WHICH CONS IST OF WDV AND ALLOWABLE DEPRECIATION FOR THE A.Y.2009-10. IN THIS ANNEXURE THE AUDITORS HAS OBSERVED AS UNDER :- 'ADDITIONS DURING THE YEAR INCLUDES AN AMOUNT OF RS . 30.99 LACS WHICH HAS BEEN QUALIFIED UNDER CAPITAL WORK-IN-PROGRESS IN TH E FINANCIAL STATEMENT.' IT IS ALSO OBSERVED THAT THE DETAILS OF CAPITAL WOR K-IN-PROGRESS HAS BEEN ELABORATED IN ANNEXURE C TO THE BALANCE SHEET FOR T HE YEAR ENDED ON 31/3/2008. FOR THE SAKE OF READY REFERENCE THE CAPITAL WORK-IN -PROGRESS MENTIONED IN THIS BALANCE SHEET IS REPRODUCED AS UNDER:- SR.NO. NARRATION AMOUNT RS. 1. BUILDING 1,07,49,986 2. PLANT & MACHINERY 27,83,222 3. ELECTRIC INSTALLATION 3,15,984 TOTAL 1,38,49,192 ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 12 THE ABOVE FACTS CLEARLY INDICATE THAT THE AUDITORS CERTIFIED THAT AS ON 31/3/2008 THE APPELLANT WAS HAVING A TOTAL WORK-IN-PROGRESS O F RS. 1,38,49,192/-. THIS INCLUDES CAPITAL WORK-IN-PROGRESS UNDER THE HEAD BU ILDING OF RS.1,07,49,986/-. IT ALSO INCLUDES CAPITAL WORK-IN-PROGRESS UNDER THE HE ADS PLANT & MACHINERY AND ELECTRIC INSTALLATION OF RS. 30,99,206/-. THE AUDIT ORS IN THE BALANCE SHEET RELEVANT FOR A.Y.2009-10 HAD NOT CLASSIFIED BUILDING CAPITAL WORK-IN-PROGRESS AS ON 3173/2009. THE A.O. HAD AGREED WITH THE OBSERVATION S OF STATUTORY AUDITORS AND HAS NOT DISALLOWED DEPRECIATION AGAINST CAPITAL WOR K-IN PROGRESS UNDER THE HEAD BUILDINGS. IT IS INTERESTING TO NOTE THAT THE AUDIT ORS HAS SPECIFICALLY MENTIONED THAT THERE EXISTS WORK-IN-PROGRESS OF RS. 30.99 LACS UND ER THE HEAD PLANT & MACHINERY AND ELECTRIC INSTALLATIONS. THE APPELLANT HAD ONLY CONTENDED THAT THE AUDITORS OBSERVATION IS RELEVANT FOR 31/3/2008. IN THIS REGA RD THE APPELLANT HAS FURNISHED COPIES OF FORM NO.SCD FOR THE A.Y.2008-09. HOWEVER, THE APPELLANT HAS NOT FURNISHED ANY EVIDENCE TO CONTROVERT THE SPECIFIC O BSERVATIONS MADE BY THE STATUTORY AUDITORS IN THE BALANCE SHEET OF A.Y.2009 -10. THE APPELLANT'S CONTENTION CANNOT BE ACCEPTED AS CAPITAL WORK-IN-PR OGRESS AS ON 31.3.2008 WAS RS. 1,38,49,192/- WHILE THE AUDITORS HAS CERTIFIED CAPITAL WORK-IN-PROGRESS AS ON 31.3.2009 AT RS. 30,99,000/-. SINCE THE AUDITORS HA D MADE SPECIFIC COMMENTS WHICH REMAINS UNCONTROVERTED, ACCORDINGLY, I AM INC LINED TO AGREE WITH THE CONTENTIONS OF LD. A.O. IN VIEW OF ABOVE FACTS, DIS ALLOWANCE OF DEPRECIATION OF RS. 4,64,815/- IS CONFIRMED. THIS GROUND OF APPEAL IS DISMISSED. 21. AGGRIEVED, ASSESSEE IS NOW IN APPEAL BEFORE THE TRIBUNAL. LD. AR SUBMITTED THAT THE ADDITION OF RS.4,64,850/- NEE DS TO BE DELETED BECAUSE IT EMANATES OUT OF TYPOGRAPHICAL ERROR MADE BY THE STATUTORY AUDITORS IN THE NOTES GIVEN IN ANNEXURE-3 OF FORM N O.3CD FOR F.Y.2008-09. LD. AR SUBMITTED THAT IMPUGNED AMOUNT OF RS.30,99,000/- WHICH HAS BEEN PROVIDED AS WORK IN P ROGRESS BY BOTH THE LOWER AUTHORITIES IN F.Y.2008-09 I.E. ASST. YEA R 2009-10 IS NOT CORRECT. IN FACT AT THE CLOSE OF F.Y.2007-08 CAPITA L WORK IN PROGRESS RELATED TO PLANT AND MACHINERY WAS AT RS.27,83,223/ - AND RS. 3,15,984/- UNDER ELECTRICAL INSTALLATION HEAD. THES E TWO TOTALS TO RS.30,99,207/-. THESE TWO ITEMS WERE PART OF THE TO TAL CAPITAL OF WORK IN PROGRESS AS ON 31.3.2008 SHOWN AT RS. 1,38,49,192/-, THE IMPUGNED WORK IN PROGRESS OF RS.30,99,207/- WERE PU T TO USE FOR THE ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 13 BUSINESS DURING F.Y.2008-09 IN THE MONTH OF MAY, 20 08. IN THE STATUTORY AUDITOR OF THE COMPANY IN ANNEXURE-3 OF F ORM NO.3CD OF F.Y.2008-09 RELATE TO DEPRECIATION ALLOWABLE AS PER IT ACT MENTIONED UNDER MARKED POINT 3 THAT ADDITION DURING THE YEAR INCLUDES AN AMOUNT OF RS.30.99 LACS WHICH HAS BEEN CLASSIFIED U NDER THE CAPITAL IN PROGRESS IN THE AUDITED FINANCIAL STATEMENT. LD. AR FURTHER CLARIFIED THAT THIS REMARK WAS MENTIONED TO SHOW THAT ADDITIO N DURING THE YEAR INCLUDES RS.30.99 LACS WHICH WAS CLASSIFIED UNDER C APITAL WORK IN PROGRESS IN THE FINANCIAL STATEMENT OF FY 2007-08. FURTHER DEPRECIATION HAS BEEN CHARGED ON THE IMPUGNED ASSET S WHICH HAVE BEEN DULY CERTIFIED BY THE AUDITORS. THEREFORE, DIS ALLOWANCE OF RS. 4,64,850/- NEEDS TO BE DELETED. LD. AR FURTHER REFE RRED TO LETTER DATED 28.5.2012 PLACED BEFORE LD. CIT(A) FOR SUPPORTING T HE CLAIM THAT DEPRECIATION OF RS. 4,64,850/- ON ELECTRICAL INSTAL LATION AND PLANT & MACHINERY SHOULD BE ALLOWED AND THE SAME READS AS U NDER :- '5.DEPRECIATION OH ELECTRICAL INSTALLATION AND PLANT & MACHINERY OF RS .4,64,850: 5.1 THE LEARNED AO HAS DISALLOWED DEPRECIATION ON E LECTRICAL INSTALLATION AND PLANT & MACHINERY OF RS. 4,64,850 ON THE GROUND THAT IT FOR MS PART OF WIP AS PER THE NOTE NO. 3 OF THE DEPRECIATION CHART. THE DEPRECIATION CHART I S ENCLOSED. THE NOTE NO.3 READS AS UNDER: 'ADDITION DURING THE YEAR INCLUDES AN AMOUNT OF RS. 30.99 LACS WHICH HAS BEEN CLASSIFIED UNDER [OPENING BALANCE] CAPITAL WIP IN THE AUDITED FINANCIAL STATEMENTS.' - 5.2 IN THE SAID CHART THE WORD OPENING BALANCE IS L EFT OUT TO BE MENTIONED THROUGH OVERSIGHT. IT IS NOT A CLOSING BALANCE. THE ANNUAL REPORT FOR THE YEAR ENDED ON 31 ST MARCH, 2008 AND 31 ST MARCH, 2009 ARE ENCLOSED. THE OPENING AND CLOSING BALANCE ARE RECONCILED AS UNDER: . PLANT & MACHINERY: - CLOSING BALANCE AS ON 31-03-2008 RS. 1932.3 0 LACS PLANT & MACHINERY INCLUDED IN WIP LAST YEAR RS. 2 7.84 LACS OPENING BALANCE AS ON 01-04-2008 RS. 1960.14 LAC S ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 14 ELECTRICAL INSTALLATION: CLOSING BALANCE AS ON 31-03-2008 RS. 141.83 LACS ELECTRICAL INSTALLATION INCLUDED IN WIP LAST YEAR RS. 3.15 LACS OPENING BALANCE AS ON 01-04-2008 RS. 144.98 LACS 5.3 FROM THE ABOVE, IT MAY PLEASE BE SEEN THAT THE ELECTRICAL INSTALLATION AND PLANT & MACHINERY OF RS. 30.99 LACS WAS THE OPENING BALANCE AND THAT THE SAID MACHINERY AND ELECTRICAL INSTALLATION HAVE BEEN USED THROUGHOUT T HE YEAR. THEREFORE, THE DEPRECIATION OF RS. 4,64,850 IS WRONGLY DISALLOWED. THE SAME MAY PL EASE BE ALLOWED.' 22. ON THE OTHER HAND, LD. DR SUPPORTED THE ORDERS OF LOWER AUTHORITIES. 23. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THROUGH THIS GROUND ASSESSEE HAS CHALLEN GED THE ORDER OF LD. CIT(A) SUSTAINING THE DISALLOWANCE OF DEPRECIAT ION OF RS.4,64,850/- ON THE IMPUGNED ASSETS OF RS.30.99 LA CS BY TREATING THEM AS WORK IN PROGRESS. IN ORDER TO EXAMINE THE F ACTS RELATING TO IMPUGNED ASSETS OF RS.30,99,207/- WE FIND THAT THIS AMOUNT COMPRISES OF RS.27,83,223/- TOWARDS PLANT & MACHINE RY AND RS.3,15,984/- TOWARDS ELECTRICAL INSTALLATION. ANAL YSING THE TAX AUDIT REPORT FOR ASST. YEAR 2007-08 WE OBSERVE THAT AT PA GE 146 OF THE PAPER BOOK DATED 6.11.2015 ANNEXURE-C TO TAX AUDIT REPORT IS APPEARING WHICH SHOWS DEPRECIATION WORKING U/S 32 OF THE I.T. ACT FOR FY 2007-08 SHOWING THE CAPITAL WORK IN PROGRESS RS. 27,83,223/- AND RS.3,15,984/- IN THE PLANT & MACHINERY AND ELECTRI CAL INSTALLATION RESPECTIVELY. FURTHER WHEN WE MOVE TO THE TAX AUDIT REPORT OF FY 2007-08 THE RELEVANT DATA IS AVAILABLE AT PAGE 185 OF THE PAPER BOOK AT ANNEXURE-3. THIS ANNEXURE-3 IS FURTHER SUPPORTED BY ANNEXURE-3A SHOWING ITEMWISE DETAILS OF ADDITION TO BLOCK OF AS SETS WITH THE ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 15 COLUMN NO., SL.NO., DETAIL OF ASSETS, AMOUNT, DATE OF PUTTING TO USE AND ASSETS HELD MORE THAN 180 DAYS OR LESS THAN 180 DAY S. ON THIS EXAMINATION OF THIS DETAILED ANNEXURE-3 AT PAGE 188 OF THE PAPER BOOK THERE APPEARS DETAILS OF ASSETS COSTING RS.27, 83,223/- WHICH WERE TRANSFERRED FROM CAPITAL WORK IN PROGRESS TO F IXED ASSETS A/C. UNDER PLANT & MACHINERY HEAD AND WERE PUT TO USE ON 3 RD MAY, 2008. SIMILARLY, ON PAGE 195 OF THIS PAPER BOOK SHOWS THA T ASSETS OF RS.3,15,984/- UNDER ELECTRICAL INSTALLATION HEAD WE RE PUT TO USE ON 22 ND MAY, 2008. AUDITORS REMARK WHICH BOTH THE LOWER AU THORITIES ARE REFERRING TO IS APPEARING AT REMARKED-3 OF ANNEXURE -3 ON DEPRECIATION DETAILS FOR FY 2008-09 IN FORM 3CD REPORT IS JUST R EFERRING THAT THE ADDITION DURING THE YEAR INCLUDES THE CAPITAL WORK IN PROGRESS WHICH MEANS THAT THE ADDITION INCLUDES SOME ASSETS WHICH HAVE BEEN PURCHASED DURING THE YEAR AND SOME ASSETS WHICH WER E FORMING OF CAPITAL WORK IN PROGRESS UPTO PREVIOUS YEAR WERE NO W SHIFTED UNDER THE BLOCK OF ASSETS FOR THE PURPOSE OF CLAIMING DEP RECIATION. WE ARE OF THE VIEW THAT REMARK OF STATUTORY AUDITORS HAS T O BE SEEN IN TOTALITY THAT ANNEXURE-3A OF THE SAME ASSETS DULY CERTIFIED BY THE SAME AUDITOR GIVING BIFURCATION OF EACH AND EVERY ASSETS TO THE DATE OF ITS BEING PUT TO USE AND ABOVE ALL THE DEPRECIATION FOR THE YEAR CLAIMED BY THE ASSESSEE IS ALSO DULY CERTIFIED BY THE SAME AUDITOR. THEREFORE, WE ARE OF THE VIEW THAT NO DISALLOWANCE WAS CALLED FOR ON DEPRECIATION OF RS.4,64,850/- ON THE ASSETS OF RS. 30,99,207/- TREATING THEM CAPITAL WORKING IN PROGRESS UPTO FY 2 007-08 AND FU 2008-09 I.E. THE ASST. YEAR UNDER CONSIDERATION, WE ALLOW THIS GROUND OF ASSESSEE. ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 16 24. GROUND NO.4 OF ASSESSEES APPEAL 4. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE D ISALLOWANCE OF RS. 1,13,521 UNDER SECTION 14A IN AS MUCH AS THE INVESTMENT IS MADE OU T OF INTEREST FREE FUNDS AND THAT # THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE ON IN VESTMENTS. 4.1 THE APPELLANT SAYS AND SUBMITS THAT ONLY T RANSACTION IS THE PURCHASE OF SHARES WORTH RS. 17,85,000 OF N.K. INDUSTRIES LTD. [NKIL] DURING THE WHOLE YEAR, THEREFORE THE QUESTION OF DISALLOWING ANY EXPENDITURE DOES NOT A RISE SINCE THERE IS NO EXPENDITURE INCURRED THEREFORE. 25. DISALLOWANCE U/S 14A OF THE ACT OF RS.1,13,521/ - MADE BY LD. ASSESSING OFFICER WAS CHALLENGED BEFORE LD. CIT(A) AND THE SAME WAS DISMISSED BY LD. CIT(A) BY OBSERVING AS UNDER : - 7.2 I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. IT IS SEEN THAT DISALLOWANCE U/S.14A HAS BEEN MADE BY THE A.O. AS PER PROVISIONS OF RULE 8D OF I.T. RULES, 1962. ON THE OTHER HAND THE APPELLANT IS CONTENDING THAT DISALLOWANCE U/S.14A CANNOT BE MADE AS THE APPELLANT IS HAVING MUCH MORE INTEREST FREE FUNDS THAN THE INVESTMENT MADE IN SHARES. THE APPELLANT HAS AL SO PLACED RELIANCE ON RELIANCE UTILITIES AND POWER LTD 313 ITR 340 (BOM). 7.3 IT IS A MATTER OF FACT THAT THE PROVISION OF RU LE 8D HAS COME INTO EFFECT FROM THE A.Y.2008-09 ONWARDS. AS PER THE PROVISIONS OF SEC.1 4A(2) R.W. RULE 8D, THE INCOME TAX ACT HAS CLEARLY PROVIDED FOR DISALLOWANC E UNDER RULE 14A AS PER THE COMPUTATION ELABORATED IN RULE 8D OF THE I.T. RULES , 1962. PROVISIONS OF 14A(2) R.W. RULE 8D DOES NOT PRESCRIBE ANY EXCEPTIONS. IN FACT PROVISIONS OF SEC.14A(3) MAKES IT VERY CLEAR THAT EVEN IN THE CASES WHERE AP PELLANT CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY IT IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THIS ACT, PROVISIONS OF SEC.14A(2) WILL BE APPLICABLE. THIS WAY DISALLOWANCE U/S.14A IS MANDATORY IN NATUR E AFTER THE A.Y.2008-09. IN VIEW OF ABOVE, I AM INCLINED TO AGREE WITH THE CONT ENTIONS OF A.O. ACCORDINGLY, DISALLOWANCE OF RS. 1.13.521/- IS CONFIRMED. THIS G ROUND OF APPEAL IS DISMISSED. 26. NOW THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUN AL. AT THE OUTSET LD. AR SUBMITTED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF ASSESSEE BY THE JUDGMENT OF HON. GUJARAT HIGH COURT IN THE CASE OF CIT VS. CORRTECH ENERGY P. LTD, REPORTED IN [2015] 372 ITR 97 (GUJ.), ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 17 COUNSEL FOR THE REVENUE SUBMITTED THAT THE ASSESSI NG OFFICER AS WELL AS CIT(APPEALS) HAD APPLIED FORMULA OF RULE 8D OF THE INCOME TAX RU LES, SINCE THIS CASE AROSE AFTER THE ASSESSMENT YEAR 2009-2010. SINCE IN THE PRESENT CAS E, WE ARE CONCERNED WITH THE ASSESSMENT YEAR 2009-2010, SUCH FORMULA WAS CORRECT LY APPLIED BY THE REVENUE. WE HOWEVER, NOTICE THAT SUB-SECTION(1) OF SECTION 14A PROVIDES THAT FOR THE PURPOSE OF COMPUTING TOTAL INCOME UNDER CHAPTER IV OF THE ACT, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. IN THE PRES ENT CASE, THE TRIBUNAL HAS RECORDED THE FINDING OF FACT THAT THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION OF ANY INCOME FROM PAYMENT OF TAX. IT WAS ON THIS BASIS THAT THE TRIBUNAL HELD THAT DISALLOWANCE UNDER SECTION 14A OF THE ACT COULD NOT BE MADE. IN THE PR OCESS TRIBUNAL RELIED ON THE DECISION OF DIVISION BENCH OF PUNJAB AND HARYANA HIGH COURT IN CASE OF COMMISSIONER OF INCOME TAX V WINSOME TEXTILE INDUSTRIES LTD REPORTED IN (2 009) 319 ITR 204 (P & H) IN WHICH ALSO THE COURT HAD OBSERVED AS UNDER (PAGE 207): '7. WE DO NOT FIND ANY MERIT IN THIS SUBMISSION. TH E JUDGEMENT OF THIS COURT IN ABHISHEK INDUSTRIES LTD (2006) 286 ITR 1 (P&H) WAS ON THE IS SUE OF ALLOWABILITY OF INTEREST PAID ON LOANS GIVEN TO SISTER CONCERNS, WITHOUT INTEREST . IT WAS HELD THAT DEDUCTION FOR INTEREST WAS PERMISSIBLE WHEN LOAN WAS TAKEN FOR BUSINESS PU RPOSE AND NOT FOR DIVERTING THE SAME TO SISTER CONCERN WITHOUT HAVING NEXUS WITH THE BUS INESS. THE OBSERVATIONS MADE THEREIN HAVE TO BE READ IN THAT CONTEXT. IN THE PRESENT CAS E, ADMITTEDLY THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION. IN SUCH A SITUATION SECTIO N 14A COULD HAVE NO APPLICATION.' 5. WE DO NOT FIND ANY QUESTION OF LAW ARISING, TAX APPEAL IS THEREFORE DISMISSED. 27. LD. AR FURTHER SUBMITTED THAT THERE IS NO EXEMP T INCOME EARNED BY ASSESSEE DURING THE YEAR AND THEREFORE NO DISALL OWANCE IS CALLED FOR U/S 14A OF THE ACT. ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 18 28. ON THE OTHER HAND, LD. DR SUPPORTED THE ORDERS OF LOWER AUTHORITIES. 29. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. ASSESSEE IS AGGRIEVED WITH THE DISALLOWA NCE U/S 14A OF THE ACT OF RS.1,13,521/- CONFIRMED BY LD. CIT(A). WE FURTHER OBSERVE THAT LD. AR SPECIFICALLY MENTIONED THAT THERE IS NO EXEMPT INCOME EARNED BY THE ASSESSEE DURING THE YEAR. WE ALSO OBS ERVE THAT IN THE JUDGMENT OF HON. JURISDICTIONAL HIGH COURT IN THE C ASE OF CIT VS. CORRTECH ENERGY P. LTD.(SUPRA) HAS CONFIRMED THE OR DER OF THE TRIBUNAL DELETING DISALLOWANCE U/S 14A OF THE ACT A S THE ASSESSEE HAS NOT CLAIMED ANY EXEMPT INCOME. SIMILAR IS THE S ITUATION IN THE CASE OF ASSESSEE AND WE RESPECTFULLY FOLLOWING THE JUDGMENT OF HON. JURISDICTIONAL HIGH COURT ARE OF THE VIEW THAT NO D ISALLOWANCE IS CALLED FOR U/S 14A AS ASSESSEE HAS NOT CLAIMED ANY EXEMPT INCOME IN THE YEAR UNDER APPEAL. WE HOLD THAT LD. CIT(A) WAS NOT CORRECT IN UPHOLDING THE DISALLOWANCE AND ALLOW THE GROUND OF ASSESSEE. 30. GROUND NO.5 OF ASSESSEE IS AS UNDER :- 5. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE DISA LLOWANCE OF RS. 56,000 BEING THE PROVISION FOR DIMINUTION IN ASSETS IN AS MUCH AS IT IS ALLOWABLE AS DEDUCTION FOLLOWING THE SUPREME COURT DECISION IN THE CASE OF VIJYA BAN K 323 ITR 166 31. DISALLOWANCE OF RS.56,000/- WAS MADE BY LD. ASS ESSING OFFICER BY NOT ALLOWING THE CLAIM OF SUNDRY DEBIT BALANCE W RITTEN OFF DURING THE YEAR BY TREATING THEM OF CAPITAL IN NATURE. THESE S UNDRY DEBIT BALANCE WERE THE OLD BALANCES LYING IN THE BANK ACCOUNT HEL D BY ASSESSEE WHICH WERE NOT RECOVERED AS NO TRANSACTIONS WERE EN TERED THROUGH ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 19 BOTH BANKS FOR LAST MANY YEARS. LD. CIT(A) CONFIRME D THE DISALLOWANCE BY OBSERVING AS BELOW :- 9.2 I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. IT IS SEEN THAT THE APPELLANT HAS CLAIMED AN EXPENSE OF RS. 56.000/- UNDER THE HE AD 'SUNDRY DEBIT BALANCES WRITTEN OFF.' IT IS ALSO A MATTER OF FACT THAT THES E ARE STATEDLY OLD BALANCE IN THE BANK ACCOUNTS AND THE APPELLANT DOES NOT HAVE ANY T RANSACTION WITH THESE BANKS FOR SO MANY YEARS. THE FACTS ON RECORD INDICATE THA T THE INCOME IN RESPECT OF THE ABOVE SAID BANK BALANCES HAD NEVER BEEN ACCOUNTED F OR BY THE APPELLANT AS INCOME IN THE EARLIER YEARS. ACCORDINGLY, THE CONDI TIONS OF SEC.36(1)(VII) ARE NOT FULFILLED JN THE CASE OF THE APPELLANT AND ACCORDIN GLY, THE APPELLANT CANNOT WRITE OFF THESE ADVANCES AS PER THE PROVISIONS OF SEC.36(1)(V II) OF THE IT ACT. IN VIEW OF THESE FACTS, I AM INCLINED TO AGREE WITH THE CONTEN TION OF THE LD. A.O. AND DISALLOWANCE OF RS.56,000/- IS CONFIRMED. THIS GROU ND OF APPEAL IS DISMISSED. 32. ON APPEAL BEFORE THE TRIBUNAL, LD. AR SUBMITTED THAT SUNDRY DEBIT BALANCE WRITTEN OFF FOR RS.56,000/- PERTAINED TO OLD BALANCE LYING WITH BANK OF BARODA AND BANK OF MAHARASHTRA LTD. WH ICH WERE VERY OLD ACCOUNTS. ASSESSEE DID NOT ENTER INTO TRANSACTI ONS WITH THE SAID BANKS AND NOTHING WAS RECOVERABLE FROM THE SAID BAN KS. THEREFORE, THESE BALANCES WERE WRITTEN OFF BY CLAIMING THEM AS EXPENDITURE IN PROFIT AND LOSS ACCOUNT AND ACCORDINGLY REDUCED THE M FROM THE GROSS DEPOSIT IN SCHEDULE-9 TO AUDITED ACCOUNTS. THIS TYP E OF EXPENSES FALLS UNDER THE CATEGORY OF GENERAL EXPENDITURE U/S 37 WHICH SHOULD HAVE BEEN ALLOWED. IN THIS CONNECTION LD. AR RELIED ON THE JUDGMENT OF HON. JURISDICTIONAL HIGH COURT IN THE CASE OF C IT VS ABDUL RAZAK & CO. (1982) 136 ITR 825 (GUJ) 33. LD. DR SUPPORTED THE ORDERS OF LOWER AUTHORITIE S. 34. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD AND GONE THROUGH THE JUDGMENT RELIED ON B Y THE ASSESSEE. ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 20 THROUGH THIS GROUND ASSESSEE HAS CHALLENGED THE ACT ION OF LD. CIT(A) CONFIRMING DISALLOWANCE OF RS.56,000/-. WE OBSERVE THAT RS.56,000/- WAS CLAIMED AS SUNDRY DEBIT BALANCE WRITTEN OFF IN THE PROFIT AND LOSS ACCOUNT. THIS GROUND RELATED TO IRRECOVERABLE BALA NCE WITH BANK OF BARODA AND BANK OF MAHARASHTRA WHICH WERE LYING IN THESE ACCOUNTS SINCE LAST MANY YEARS AND NO TRANSACTION WITH THE S AID BANKS HAPPENED TO BE IN PAST FEW YEARS. WE OBSERVE THAT A SSESSEE IS A LIMITED COMPANY CARRYING ON BUSINESS FOR LAST MANY YEARS AND TRANSACTIONS WITH THE BANK IS IN REGULAR COURSE OF BUSINESS. SOME TIMES FOR BUSINESS EXPEDIENCIES NEW BANK ACCOUNTS A RE OPENED FOR HAVING SMOOTH WORKING OF BUSINESS AND QUICK SERVICE S. IN THIS PROCESS BUSINESS TRANSACTION MOVES TO THE NEW BANK ACCOUNT AND THE PREVIOUS BANK ACCOUNT BECOME INOPERATIVE. SIMILAR T HINGS HAPPENED IN THE CASE OF ASSESSEE WHERE RS.56,000/- REMAINED UNUTILIZED IN SUCH DEFUNCT BANK ACCOUNT AND DUE TO LACK OF ENTERI NG TRANSACTIONS FOR LAST MANY YEARS SUCH TYPE OF BALANCES ARE TRANS FERRED TO SUSPENSE ACCOUNT BY THE BANKS. CERTAINLY TRANSFER O F SUCH TYPE OF BALANCE IN SUNDRY DEBIT BALANCES WRITTEN OFF ACCOUN T IS RIGHTLY COVERED UNDER THE PROVISIONS OF SECTION 37 OF THE ACT. WE F URTHER OBSERVE THAT JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. AB DUL RAZAK & CO. (SUPRA) HAS DEALT WITH SIMILAR ISSUE ABOUT IRRECOV ERABLE ADVANCES AND HAS HELD THE SAME TO BE ALLOWABLE REVENUE EXPEN DITURE BY OBSERVING AS UNDER :- 7. IN VIEW OF THESE WELL ACCEPTED LEGAL PRINCIPLES, IN OUR OPINION, BY NECESSARY IMPLICATION, EITHER SHORT-TERM OR LONG-TERM FINANCI NG IS AN INTEGRAL PART OF THE COMMISSION AGENCY BUSINESS. AS A COMMISSION AGENT, ONE EITHER BUYS THE GOODS OR SELLS THE GOODS FOR ONE'S PRINCIPAL. WHEN HE ACT S AS A COMMISSION AGENT FOR SALES OF GOODS, HE PURCHASES THE GOODS FOR SUPPLY T O HIS PRINCIPAL FROM HIS FUNDS ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 21 AND THEN HE IS REIMBURSED BY HIS PRINCIPAL ON SUPPL Y OF SUCH GOODS. A COMMISSION AGENT, THEREFORE, HAS GOT TO ADVANCE AMO UNTS FROM TIME TO TIME ACCORDING TO THE NATURE OF HIS BUSINESS. IT MAY BE A SHORT-TERM ADVANCE IF HE IS A COMMISSION AGENT FOR PURCHASE OF GOODS OR IT MAY BE A LONG-TERM ADVANCE IF IT IS FOR SALE OF GOODS. WE HAVE, THEREFORE, NOT BEEN ABL E TO APPRECIATE AS TO HOW THE TRIBUNAL APPROACHED THE PROBLEM AS IF THE FINANCIAL LENDING WHICH IS INVOLVED IN THE BUSINESS OF COMMISSION AGENCY IS A SEPERATE AND EXCLUSIVE BUSINESS AND NOT AN INTEGRAL PART OF THE COMMISSION AGENCY BUSINESS. IT IS AN ADMITTED POSITION HERE BEFORE US THAT THE ASSESSEE-FIRM WAS DOING THE BUSINESS AS COMMISSION AGENTS AND DEALERS IN GROCERY ARTICLES. IT IS ALSO AN ADMITTED POSITION THAT M/S. MOHMAD PEER MOHMAD OF NASIK ENGAGED THE ASSESSEE-FI RM AS COMMISSION AGENTS FOR PURPOSES OF PURCHASE OF GOODS. THE ONE SET OF A CCOUNT IN THE TRADING BOOKS OF THE ASSESSEE-FIRM COMPRISES OF THIS COMMISSION AGEN CY BUSINESS FOR PURCHASE OF THE GOODS CARRIED ON BY THE ASSESSEE-FIRM KNOWN AS 'SARAFI ACCOUNT'. IT IS, HOWEVER, IN OUT OPINION, THE INTERFERENCE OF THE TR IBUNAL FROM THESE TWO SETS OF ACCOUNTS OF M/S. MOHMAD PEER MOHMAD OF NASIK THAT T HESE WERE TWO DIFFERENT BUSINESSES, WHICH IS NOT JUSTIFIED. IT IS NO DOUBT TRUE THAT IN THE PRESENT CASE BEFORE US THE BAD DEBT WHICH HAS BEEN CLAIMED BY TH E ASSESSEE-FIRM WAS IN RESPECT OF ADVANCE MADE TO THE PRINCIPAL, M/S. GOKA LDAS VIRJIBHAI OF SANGLI WITH WHOM THE SAID PRINCIPAL HAD INDEPENDENT DEALINGS. I T IS ALSO AN ADMITTED POSITION THAT THE TRADING ACCOUNT OF M/S. MOHMAD PEER MOHMAD OF NASIK IN THE BOOKS OF THE ASSESSEE-FIRM WAS SETTLED AND THERE WAS NO OUTS TANDING WHICH HAD BEEN CARRIED TO THE SARAFI ACCOUNT OF THE SAID PARTY. TH ESE FACTS, HOWEVER, IN OUR OPINION, ARE NOT SUFFICIENT TO NECESSARILY REACH TH E CONCLUSION AS HAS BEEN DONE BY THE TRIBUNAL THAT THE LENDING WAS NOT A PART OF THE GENERAL COMMISSION AGENCY BUSINESS. THE GENERAL LIEN GRANTED, INTER ALIA, TO THE FACTORS WHO ARE THE COMMISSION AGENTS FOR SALE OF GOODS UNDER S. 171 AND OF AGENTS UNDER S. 221 OF THE INDIAN CONTRACT ACT EXTENDS TO THE GENERAL BALANCE OF ACCOUNT OF THEIR PRINCIPAL WHICH WOULD, THEREFORE, NECESSARILY INCLUDE THE ADV ANCES MADE APART FROM STRICTLY IN THE COURSE OF THE BUSINESS AS FACTORS OR COMMISS ION AGENTS FOR PURCHASE AND SUPPLY OF GOODS. IT IS A MATTER OF SURPRISE HOW THE TRIBUNAL LOST SIGHT OF THE FINDING MADE BY THE ITO THAT IN THE COURSE OF THE B USINESS OF COMMISSION AGENCY, THE ASSESSEE-FIRM HAD ADVANCED MONEY TO THE CONSTIT UENTS WHO WHERE REQUIRED TO PAY INTEREST ON SUCH ADVANCES. IT IS NO DOUBT TRUE THAT THE ITO HAS FOUND THAT THESE ADVANCES WERE MADE TO THE CONSTITUENTS AGAINS T THE GOODS RECEIVED FROM THEM FOR SALE ON COMMISSION BASIS, BUT THAT OBSERVA TION OF THE ITO, IN OUR OPINION, DOES NOT DETRACT FROM THE NATURE OF THE BU SINESS OF COMMISSION AGENTS, WHETHER FOR SALE OR PURCHASE OF THE GOODS, WHICH, I N OUR OPINION, NECESSARILY REQUIRES THE ADVANCES TO BE MADE. WE SHOULD NOT BE, HOWEVER, UNDERSTOOD TO SUBSCRIBE TO THE VIEW THAT IF IN A GIVEN CASE A TRA DER DOING COMMISSION AGENCY BUSINESS MAKES ADVANCES OR LENDS MONEY TO AN UNKNOW N OUTSIDER OR TO A COMPLETE STRANGER, IT WOULD BE A PART OF HIS COMMIS SION AGENCY BUSINESS. IN THE PRESENT CASE, HOWEVER, THE ITO HAS NOT ONLY FOUND T HAT THE ASSESSEE-FIRM WAS MAKING SUCH ADVANCES IN THE COURSE OF COMMISSION AG ENCY BUSINESS BUT THE ITO, RAJKOT, HAS ALSO RECORDED THE STATEMENT OF ONE OF T HE PARTNERS OF THE ASSESSEE- FIRM WHERE SHRI AHMED IBRAHIM SAHIGRA STATED, INTER ALIA, THAT THE FIRM WAS CARRYING ON MONEY-LENDING BUSINESS AT BOMBAY AND NO LICENCE WAS NECESSARY FOR ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 22 SUCH BUSINESS AND THE TRANSACTIONS WERE RECORDED IN THE COMMON TRADING BOOKS OF ACCOUNT OF THE FIRM. IN ANSWER TO QUESTION NO. 1 0 HE STATED THAT M/S. MOHMAD PEER MOHMAD OF NASIK APPROACHED THEM FOR LOAN AND R EQUESTED THEM TO SEND MONEY ON THEIR BEHALF TO M/S. GOKALDAS VIRJIBHAI OF SANGLI FROM WHOM M/S. MOHMAD PEER MOHMAD OF NASIK HAD PURCHASED THE GOODS WERE NOT PREPARED TO WAIT FOR THEIR DUES AND AS THE LATTER ENJOYED BETTE R CREDIT FACILITY WITH THE ASSESSEE-FIRM THEY APPROACHED THEM FOR PAYING OFF T HE DUES TO THE SANGLI PARTY. IN ANSWER TO QUESTION NO. 17 AS TO WHEN THEY POST ENTR IES FOR INTEREST IN THE BOOKS, THE DEPONENT STATED THAT IN THE ACCOUNTS OF THEIR C ONSTITUENTS THEY MAKE ENTRIES AT THE END OF THE ACCOUNTING PERIOD WHILE IN THE CASE OF OTHER ADVANCES, THE ENTRIES ARE MADE WHEN THE INTERESTS AMOUNTS ARE RECEIVED. A DMITTEDLY, M/S. MOHMAD PEER MOHMAD OF NASIK WAS THE CONSTITUENT OF THE ASS ESSEE-FIRM. THE ITO, NASIK, HAS ALSO RECORDED THE STATEMENT OF ONE OF THE PARTN ER OF THIS DEBTOR-FIRM, WHERE THE DEPONENT-PARTNER HAS STATED THAT THEIR FIRM OF M/S. MOHMAD PEER MOHMAD OF NASIK HAD TRADING RELATIONS WITH THE ASSESSEE-FIRM FOR MORE THAN 30 YEARS, AND THEY ENJOYED GREATER CREDIT FACILITY WITH THEM WHIC H WAS NOT AVAILABLE FROM M/S. GOKALDAS VIRJIBHAI OF SANGLI. THE TRIBUNAL HAS OVER LOOKED THESE STATEMENTS OF THE ASSESSEE AND THE DEBTOR-FIRM WHERE IT HAS BEEN CLEA RLY STATED THAT THESE ADVANCES WERE ASKED FOR AND MADE IN FACT HAVING REGARD TO TH E COMMERCIAL RELATIONS WERE ADMITTEDLY OF PRINCIPAL AND COMMISSION AGENTS. IN O UR OPINION, THEREFORE, THE TRIBUNAL WAS NOT JUSTIFIED ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE TO HOLD THAT THE ADVANCE TO M/S. MOHMAD PEER MOHMAD OF NASIK WAS NOT IN THE ORDINARY COURSE OF BUSINESS OF THE ASSESSEE-FIRM AN D MERELY INCIDENTAL TO IT. AS HELD BY THIS COURT IN CIT V. EQUITORIAL PVT. LTD . [1974] TAXATION 37(3)-82, THE DEBT OWED BY M/S. MOHMAD PEER MOHMAD OF NASIK WAS ONE WH ICH SPRANG DIRECTLY FROM THE BUSINESS OF THE ASSESSEE AND WAS ALLOWABLE AS A BAD DEBT, AND, CONSEQUENTLY, THEREFORE, A TRADING LOSS UNDER SECTION 28(1) . IT IS NO DOUBT TRUE THAT EVERY LOSS IS NOT SO DEDUCTIBLE UNLESS IT IS I NCURRED IN CARRYING OUT THE OPERATION OF THE BUSINESS. [VIDE CIT V. NAINITAL BANK LTD . [1965] 55 ITR 707 (SC)]. IN THAT VIEW OF THE MATTER, THEREFORE, FOR T HE REASONS STATED IN THIS ORDER, WE ARE OF THE OPINION THAT THE SAID LOSS BEING A BA D DEBT IS ALLOWABLE AS TRADING LOSS UNDER S. 28 OF THE I.T. ACT, 1961, AND, THEREFORE, FOR THE REA SONS STATED HEREINABOVE, THE ANSWER TO THE QUESTION REFERRED TO US IS IN THE AFFIRMATIVE, THAT IS, IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVEN UE. 35. RESPECTFULLY FOLLOWING THE JUDGMENT OF HON. JUR ISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. ABDUL RAZAK & CO. (SUP RA), WE ARE OF THE CONSIDERED OPINION THAT SUNDRY DEBIT BALANCE WRITTE N OFF FOR RS.56,000/- SHOULD BE ALLOWED AS A REVENUE EXPENDIT URE. THIS GROUND OF ASSESSEE IS ALLOWED. ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 23 IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 36. NOW WE TAKE REVENUES APPEAL IN ITA NO.2133/AHD /2012 FOR ASST. YEAR 2009-10 WHEREIN FOLLOWING GROUNDS HAVE B EEN RAISED :- I) THE ID, CIT (A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF RS.36,30,000/- MADE U/S 40(A)(IA) OF THE I T ACT, II) THE ID. CIT (A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF RS.83,98,0007- MADE ON ACCOUNT OF NON COMPLIANCE OF THE PROVISION OF SECTION 194H OF THE I T ACT WHILE MAKING PAYMENT OF COMMISS ION TO THE DIRECTORS. III) THE ID. CIT (A) HAS ERRED IN LAW AND ON F ACTS IN DELETING THE DISALLOWANCE OF RS.91,07,505/- MADE ON ACCOUNT OF ON ACCOUNT OF INT EREST ON NON INTEREST BEARING ADVANCE. IV) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT (A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER. V) IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE L D. COMMISSIONER OF INCOME TAX (A) MAY BE SET-ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 37. GROUND NO. (I) OF REVENUES APPEAL IS AS UNDER I) THE ID, CIT (A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF RS.36,30,000/- MADE U/S 40(A)(IA) O F THE I T ACT, 38. DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT CAME UP BEFORE THE LD. ASSESSING OFFICER THAT A DEDUCTION O F 50,70,317/- WAS CLAIMED FOR PRIOR PERIOD EXPENDITURE WHICH WERE NOT DEBITED IN THE BOOKS OF ACCOUNT BY THE ASSESSEE IN THE EARLIER YEA RS AND THE SAME WERE CLAIMED IN THE YEAR UNDER APPEAL AS ASSESSEE H AS DEDUCTED AND PAID TDS IN RESPECT OF THESE PRIOR PERIOD EXPEN DITURE. THIS AMOUNT OF PRIOR PERIOD EXPENDITURE WAS DISALLOWED A T THE TIME OF FRAMING ASSESSMENT ORDER BY LD. ASSESSING OFFICER. IN APPEAL BEFORE ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 24 LD. CIT(A) DISALLOWANCE OF RS.36.30 LACS WAS DELETE D SINCE ASSESSEE HAS DEDUCTED AND PAID TAXES ON THESE EXPENSES AND C ONFIRMED THE DISALLOWANCE FOR RS.14.4 LACS AS NO SPECIFIC DETAIL S ABOUT THE TYPE OF EXPENDITURE INCURRED WERE AVAILABLE ON RECORD BY OB SERVING AS UNDER- B. DISALLOWANCE OF RS. 50.70.317/- IT IS SEEN THAT DURING THE YEAR UNDER CONSIDERATION THE APPELLANT HAS CLAIMED DEDUCTION OF RS, 50, 70, 31 71- WHICH ARE PRIOR PERIOD EXPENSES. THESE EXPENSES WERE NOT DEBITED IN THE BOOKS OF ACCOUNTS BY THE AP PELLANT IN THE EARLIER YEARS. THIS WAY THE DISALLOWANCE OF THESE EXPENSES IN THE EARLIER YEARS AS PER THE PROVISIONS OF SEC.40(A)(IA) DOES NOT ARISE. HOWEVER , THE APPELLANT HAS DEDUCTED AND PAID TDS IN RESPECT OF THESE EXPENSES DURING TH E YEAR UNDER CONSIDERATION. THE APPELLANT HAS CLAIMED THESE EXPENSES DURING THE YEAR UNDER CONSIDERATION AS PER THE PROVISIONS OF SEC.40(A)(IA). THE A.O. WA S OF THE OPINION THAT FOR ALLOWANCE OF THESE EXPENSES DURING THE YEAR UNDER C ONSIDERATION AS THE SAME HAS TO BE DEBITED IN THE BOOKS OF ACCOUNTS IN THE R ESPECTIVE ASSESSMENT YEAR AND THE SAME SHOULD HAVE BEEN DISALLOWED IN THAT YE AR U/S.40(A)(IA). AFTER FULFILLMENT OF THESE CONDITIONS, THE APPELLANT CAN CLAIM THESE EXPENSES DURING THE YEAR UNDER CONSIDERATION AFTER PAYMENT OF TDS. IT IS SEEN THAT A SIMILAR ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE HON'BLE GILEU.TTA ITAT IN ABN AMRO BANK VS JCIT REPORTED AT 97 ITD 1 (3RD MEMBER). FOR THE SAKE OF READY REFERENCE THE CONCLU DING PARA OF THIS ORDER IS REPRODUCED AS UNDER :- '81.LT IS INTERESTING TO NOTE THAT THE PROVISIONS O F S.40(A)(I) ARE DISABLING PROVISIONS AS WELL AS ENABLING PROVISIONS. WHILE S.40(A) LAYS DOWN THE RESTRICTIONS ON DEDUCIBILITY OF CERTAIN EXPENSES, PROVISO TO S. 40( A)(I) LAYS DOWN THE CONDITIONS IN WHICH SUCH AN EXPENSE IS TO BE ALLOWED. 82.NORMALLY, PROVISO TO A SECTION SETS OUT AN EXCEP TION TO THE SCOPE OF SECTION. IT CRAVES OUT AN AREA, OUT OF THE AREA COVERED BY THE SCOPE OF THE SECTION, AND TAKES IT AWAY FROM APPLICABILITY THEREOF. AS LUSH J SAID, 'WHEN ONE FINDS A PROVISO TO A SECTION, THE NATURAL PRESUMPTION IS TH AT, BUT FOR THE PROVISO, THE ENACTING PART OF SECTION WOULD HAVE INCLUDED THE SU BJECT-MATTER OF THE PROVISO.' AS LORD MACNAGHATEN OBSERVED, 'THE PROVISO MAY BE A QUALIFICATION OF THE PRECEDING ENACTMENT WHICH IS EXPRESSED IN TERMS TOO GENERAL TO BE ACCURATE'. NO DOUBT THAT, MORE OFTEN THAN NOT, IT IS SOMEWHAT ALI EN TO THE PROPER FUNCTION OF A PROVISO TO READ IT AS PROVIDING SOMETHING BY WAY OF AN ADDENDUM OR DEALING WITH A SUBJECT WHICH IS NOT DIRECTLY RELEVANT TO THE SEC TION OF WHICH IT IS A PROVISO. IN OTHER WORDS, NORMALLY A PROVISO OPERATES AS AN EXCE PTION, RATHER THAN AS A ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 25 SUBSTANTIVE PROVISION. HOWEVER, AS WAS OBSERVED BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. JAGANNATH MAHADEO PRASAD (1969) 71 ITR 296 (S.C) 'WHERE THE LANGUAGE IS QUIT E CLEAR AND NO OTHER VIEW IS POSSIBLE, IT IS FUTILE JO-GO INTO THE QUESTION WHET HER THE PROVISO TO S. 24(1) OPERATES AS A SUBSTANTIVE PROVISION OR ONLY BY WAY OF AN EXCEPTION TO S.24(1)'. THE WORDS OF PROVISO TO S. 40(A)(I) ALSO BEING CLEA R AND BEING FREE FROM ANY AMBIGUITY, AND IN VIEW OF THE PRINCIPLE SO LAID DOW N BY THE HON'BLE SUPREME COURT IN THE CASE OF JAGANNATH MAHADEO PRASAD (SUPR A), THIS PROVISO IS TO BE VIEWED AS A SUBSTANTIVE PROVISION AND AS, TO REPEAT MY WORDS IN THE PRECEDING PARA, AN ENABLING PROVISION. 83. IN THE LIGHT OF THE ABOVE DISCUSSIONS AND IN VI EW OF THE FACT THAT THE LEARNED VICE PRESIDENT HAS CONFIRMED THE DISALLOWANCE OF RE MUNERATION AND TAX IN RESPECT OF 1990-91 AND 1991-92 ONLY ON THE GROUND T HAT THE ASSESSEE HAD NOT MADE CLAIM FOR DEDUCTION THEREOF IN THE RESPECTIVE YEARS, DISSOCIATE MYSELF FROM THIS CONCLUSION ARRIVED AT BY THE LEARNED VICE PRES IDENT. IN MY CONSIDERED VIEW, THEREFORE, THE DEDUCTION OF REMUNERATION AND TAX IN RESPECT OF 1990-91 AND 1991- 92 IS TO BE ALLOWED IN THE ASST YR. 1995-96, I.E., THE YEAR IN WHICH THE ASSESSEE HAS DULY DISCHARGED THE TAX DEDUCTION AT SOURCE OBL IGATION IN RESPECT OF THE SAME.' RESPECTFULLY FOLLOWING THE ABOVE SAID DECISION I AM OF THE CONSIDERED VIEW THAT THE FOLLOWING THREE EXPENSES WHERE PROVISIONS OF CH APTER XVII OF THE INCOME-TAX SHOULD BE ALLOWED SINCE THE TAX DEDUCTION AND PAYME NT OBLIGATION ON THESE EXPENSES HAS BEEN DISCHARGED BY THE APPELLANT DURIN G THE YEAR UNDER CONSIDERATION. SR. NO. PARTICULARS AMOUNT (RS. IN LACS) 1. ADVERTISEMENT EXPENSES 19.66 2. BROKERAGE AND COMMISSION EXPENSES 13.77 3. LEGAL AND PROFESSIONAL EXPENSES 2.87 TOTAL 36.30 THE A.O. IS DIRECTED TO ALLOW EXPENSES TO THE EXTEN T OF RS. 36.3 LACS. THE APPELLANT WILL GET RELIEF TO THIS EXTENT. THE APPELLANT HAS ALSO CLAIMED OTHER MISCELLANEOUS EXPENSES OF RS. 14.4 LACS WHICH PERTAINS TO EARLIER YEARS BUT ON THESE EXPENS ES THE APPELLANT HAD DEDUCTED TOE TAXES AND PAID THE SAME TO THE GOVERNMENT ACCOU NT DURING THE YEAR UNDER CONSIDERATION. IT IS INTERESTING TO NOTE THAT APPEL LANT HAS NOT FURNISHED NATURE OF THESE EXPENSES. APPARENTLY THESE EXPENSES DOES NOT ATTRACT THE LIABILITY OF TAX ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 26 DEDUCTED AT SOURCE AS PER THE PROVISIONS OF CHAPTER XVII OF I.T.ACT. ACCORDINGLY, THESE EXPENSES CAN NEITHER BE DISALLOWED AS PER THE PROVISIONS OF SEC.40(A)(IA) ON THE FIRST INSTANCE IN THE EARLIER YEARS U/S.40(A )(IA) AND THE SAME CANNOT BE ALLOWED AS PER THE PROVISIONS OF SEC.40(A)(IA) ON P AYMENT OF TDS DURING THE YEAR UNDER CONSIDERATION. IN VIEW OF ABOVE, DISALLOWANCE TO THE EXTENT OF RS. 14.4 LACS IS CONFIRMED. AS A RESULT THE APPELLANT WILL GET RELIEF OF RS. 36 .3 LACS. ADDITION TO THE EXTENT OF RS. 26,94,384/- (14,40,000/- + 12,54,384/-) IS CONF IRMED. THIS GROUND OF APPEAL IS PARTLY ALLOWED. 39. AGGRIEVED, REVENUE IS NOW IN APPEAL BEFORE THE TRIBUNAL. 40. LD. DR SUPPORTED THE ORDER OF ASSESSING OFFICER . 41. ON THE OTHER HAND, LD. AR SUBMITTED THAT EXPEND ITURE OF RS.36.3 LACS WHICH WAS NOT CLAIMED IN EARLIER YEARS BUT AS DURING THE YEAR UNDER APPEAL DUE TDS WAS DEDUCTED AND DEPOSITED, CL AIMING OF THESE EXPENDITURES OF RS.36.3 LACS WERE JUSTIFIED. LD. AR FURTHER SUBMITTED THAT EVEN IN CASE THESE EXPENSES HAD BEEN CLAIMED IN THE EARLIER YEAR THEY CERTAINLY WOULD HAVE BEEN DISALLO WED BECAUSE AS PER THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT NO TDS WAS DEDUCTED AND DEPOSITED AND SHOULD BE ALLOWED ONLY I N THE YEAR WHEN TDS IS PAID. THEREFORE, LD. CIT(A) HAS RIGHTLY DELE TED THE DISALLOWANCE OF RS.36.3 LACS. 42. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THROUGH THIS GROUND REVENIE IS AGGRIEVED WITH THE DELETION OF ADDITION OF RS.36.3 LACS U/S 40(A)(IA) OF THE AC T MADE BY ASSESSING OFFICER. FROM GOING THROUGH THE RECORD, WE OBSERVE THAT CLAIM OF RS.50,70,317/- WAS MADE FOR PRIOR PERIOD EXPENDITUR E INCURRED UNDER THE FOLLOWING HEADS :- ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 27 I) DEVELOPMENT EXPENSES RS.19.66 LACS II) BROKERAGE & COMMISSION RS.17.77 LACS III) LEVAL PROFESSIONAL EXPENSES RS.2.87 LACS. ----------------- RS.36.3 LACS IV) MISCELLANEOUS EXPENSES RS.14.4 LACS -------------- RS.50.7 LACS 43. WE FIND THAT LD. CIT(A) SUSTAINED DISALLOWANCE ON THE AMOUNT OF RS.14.4 LACS TOWARDS MISCELLANEOUS EXPENSES WHICH W E HAVE DEALT WHILE ADJUDICATING GROUND NO.1 OF ASSESSEES APPEAL . 44. NOW AS FAR AS REMAINING AMOUNT OF RS.36.3 LACS IS CONCERNED WE FIND THAT THERE IS NO DISPUTE ON THE PART OF REV ENUE ABOUT THE GENUINENESS OF THE EXPENDITURE CLAIMED FOR RS.36.3 LACS AS WELL AS THE AMOUNT OF TDS DEDUCTED AND DEPOSITED. DISALLOWA NCE OF THESE EXPENSES ON THE PART OF ASSESSING OFFICER AROSE BEC AUSE OF HIS VIEW THAT THE EXPENDITURE WHICH HAS NEVER BEEN CLAIMED I N EARLIER YEARS AND WAS NOT DISALLOWED U/S 40(A)(IA) OF THE ACT IN THE YEAR OF INCURRING OF THESE EXPENSES DUE TO NON-DEDUCTION OF TDS THEN SUCH EXPENDITURE CANNOT BE CLAIMED IN THE FOLLOWING YEAR S BECAUSE THEY WERE NEVER DEBITED IN THE ACCOUNT OF EARLIER YEARS. 45. WE OBSERVE THAT IN THE GIVEN CIRCUMSTANCES WHEN THERE IS NO DISPUTE TO THE GENUINENESS OF THE EXPENDITURE WHICH PROVES THAT THESE EXPENSES OF RS.36.3 LACS WERE ACTUALLY INCURR ED IN EARLIER YEARS BUT COULD NOT HAVE BEEN CLAIMED FOR SOME REASON OR OTHER. EVEN IF ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 28 THESE EXPENDITURE HAD BEEN CLAIMED, THEY CERTAINLY WOULD HAVE BEEN DISALLOWED U/S 40(A)(IA) OF THE ACT AS NO TAX WAS D EDUCTED AND DEPOSITED. THIS EXERCISE OF DEDUCTING AND DEPOSITIN G TDS WAS CARRIED OUT IN THE YEAR UNDER APPEAL WHICH FULFILLS ALL THE CONDITIONS OF SECTION 40(A)(IA) OF THE ACT WHICH ALLOWS TO CLAIM DEDUCTION OF SUCH EXPENDITURE IN THE YEAR IN WHICH DUE TAXES (TDS) AR E DEPOSITED. BY CLAIMING THIS EXPENDITURE OF RS.36.3 IN THIS YEAR T HERE IS NO IMPACT TO THE REVENUE IN TERMS OF TAX LIABILITY. WE ARE, THER EFORE, OF THE VIEW THAT ASSESSEE SHOULD BE ALLOWED DEDUCTION U/S 40(A) (IA) OF THE ACT FOR RS.36.3 LACS AND THEREFORE, NO INTERFERENCE IS CALL ED FOR IN THE ORDER OF LD. CIT(A) WITH RESPECT TO THIS GROUND. ACCORDINGLY THIS GROUND OF REVENUE IS DISMISSED. 46. GROUND NO.(II) OF REVENUES APPEAL - II) THE ID. CIT (A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF RS.83,98,0007- MADE ON ACCOUNT OF N ON COMPLIANCE OF THE PROVISION OF SECTION 194H OF THE I T ACT WHI LE MAKING PAYMENT OF COMMISSION TO THE DIRECTORS. 47. DURING ASSESSMENT PROCEEDINGS IT WAS OBSERVED B Y LD. ASSESSING OFFICER THAT COMMISSION OF RS.83.98 LACS WAS GIVEN TO THE CHAIRMAN AND MANAGING DIRECTOR AT RS.41.99 LACS EAC H. NO TAX WAS DEDUCTED AT SOURCE ON THIS AMOUNT DURING THE YEAR. AS PER LD. ASSESSING OFFICER DISALLOWANCE WAS CALLED FOR ON TH IS AMOUNT OF RS.83,98 LACS. ASSESSEE SUBMITTED THAT COMMISSION P AID TO DIRECTORS WAS PART OF SALARY AND THE DUE TDS WAS DEDUCTED AND DEPOSITED IN SUBSEQUENT YEAR AND ALSO PROVISIONS OF SECTION 40(A )(IA) OF THE ACT DO NOT APPLY ON THE EXPENDITURE INCURRED ON SALARY SUB JECT TO TDS U/S ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 29 192 OF THE ACT. ASSESSING OFFICER WAS NOT CONVINCED AND MADE DISALLOWANCE OF RS.83.99 LACS. IN APPEAL BEFORE FIR ST APPELLATE AUTHORITY IMPUGNED DISALLOWANCE OF RS.83,98,000/- W AS DELETED BY LD. CIT(A) BY OBSERVING AS UNDER :- 6.3 I HAVE CAREFULLY CONSIDERED RIVAL SUBMISSIONS. IT IS SEEN THAT THE A.O. DISALLOWED COMMISSION PAID TO THE DIRECTORS OF RS. 83,98,000/- ON THE PREMISE THAT DEDUCTION OF TAX AT SOURCE ON THE COMMISSION P AYMENT WAS NOT MADE AS PER THE PROVISIONS OF SEC.194H OF THE I.T. ACT. IT IS A LSO OBSERVED THAT THE COMMISSION OF RS. 83,98,000/- HAS BEEN PAID TO THE DIRECTORS A S PART OF THE DIRECTORS REMUNERATION. IN THIS REGARD THE APPELLANT HAS FILE D COPIES OF MINUTES OF MEETING OF BOARD OF DIRECTORS OF THE APPELLANT COMPANY DATE D 173/2009, WHEREIN THE COMPANY HAD AGREED TO PAY TO THE DIRECTORS FIXED SA LARY OF RS.3,00,000/- PER MONTH. IN ADDITION TO THIS 30% OF NET PROFIT MADE B Y THE COMPANY DURING THE YEAR 2008-09 AND SUBSEQUENT YEARS WAS ALSO TO BE PAID TO THE DIRECTORS AS PART OF DIRECTORS REMUNERATION. IT IS ALSO A MATTER OF RECO RD THAT TDS ON DIRECTORS REMUNERATION HAS BEEN MADE BY THE APPELLANT AS PER THE PROVISIONS OF SEC.192 OF THE I.T ACT. THIS INCLUDES TDS ON IMPUGNED COMMISSI ON PAYMENT OF RS. 83,98,000/-. THE TDS WAS DULY DEPOSITED TO THE GOVT . ACCOUNT AS PER THE PROVISIONS OF THE I.T. ACT, THE ABOVE FACTS CLEARLY REVEALS THAT THE COMMISSION WAS PART AND PARCEL OF THE DIRECTORS REMUNERATION A ND IN MY CONSIDERED VIEW THE APPELLANT HAS RIGHTLY DEDUCTED TAX ON THESE PAYMENT S AS PER THE PROVISIONS OF SEC.192 OF THE I.T. ACT. IN THIS REGARD THE APPELLA NT HAS RIGHTLY PLACED RELIANCE ON JAHANGIR BIRI FACTORY VS DCIT REPORTED AT 126 TTJ 5 67 (KOL). IN THIS CASE IT IS HELD BY THE HON'BLE ITAT THAT COMMISSION PAID TO TH E DIRECTORS AS PER THE TERMS OF EMPLOYMENT HAS TO BE TREATED AS INCENTIVE IN ADD ITION TO SALARY AND THE SAME DID NOT COME WITHIN THE PURVIEW OF COMMISSION OR BR OKERAGE AS DEFINED IN SEC.194H OF THE I.T. ACT. IN VIEW OF THE ABOVE I HO LD THAT THE COMMISSION PAID TO THE DIRECTORS IS PART AND PARCEL OF SALARY AND THE APPELLANT HAS RIGHTLY DEDUCTED TAX ON DIRECTORS REMUNERATION AS PER THE PROVISIONS OF SEC. 192 OF THE L.T. ACT. IN VIEW OF ABOVE THE ADDITION OF RS. 83,98,000/- IS UN TENABLE. OTHERWISE ALSO THE METHOD ADOPTED BY THE A.O. IS PREJUDICIAL TO THE IN TEREST OF REVENUE. AS PER THE PROVISIONS OF SEC.192 OF THE L.T. ACT, TDS ON SALAR Y IS DEDUCTED AT THE RATE OF ALMOST 30 TO 33%. IN THIS CASE THE TAX HAS BEEN DED UCTED AT THE RATE OF 33%. AS PER THE PROVISIONS OF SEC.194H, THE TAX IS TO BE DE DUCTED @10% ONLY. AS THE APPELLANT HAS DEDUCTED MORE TAX BY FOLLOWING THE PR OVISIONS OF SEC. 192, ACCORDINGLY, IT CANNOT BE SAID THAT BY DEDUCTING TH E TAX AS PER THE PROVISIONS OF SEC. 192, THE APPELLANT HAD TRIED TO DEDUCT LESSER TAX AT SOURCE. IN VIEW OF ABOVE FACTS, THE A.O. IS DIRECTED TO DELETE ADDITION OF R S.83,98,000/-. THIS GROUND OF APPEAL IS ALLOWED. 48. AGGRIEVED, REVENUE IS NOW IN APPEAL BEFORE THE TRIBUNAL. ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 30 49. LD. DR SUPPORTED THE ORDER OF ASSESSING OFFICER . 50. ON THE OTHER HAND, LD. AR OF ASSESSEE SUBMITTED THAT SUME OF RS.83,98,000/- WAS ACTUALLY PART OF SALARY TO THE D IRECTORS ON WHICH TDS WAS DEDUCTED AS PER SECTION 192 OF THE ACT WHER EAS AS PER LD. ASSESSING OFFICER TDS HAD TO BE DEDUCTED AS PROVISI ONS OF SECTION 194H OF THE ACT. LD. AR ALSO SUBMITTED THAT PROVISI ONS OF SECTION 40(A)(IA) OF THE ACT ARE NOT APPLICABLE ON THE EXPE NDITURE CALLING FOR TDS U/S 192 OF THE ACT AND FOR THIS REASON ALSO NO DISALLOWANCE IS CALLED FOR U/S 40(A)(IA) OF THE ACT. FURTHER LD. AR RELIED ON THE JUDGMENT OF HON. GUJARAT HIGH COURT IN THE CASE OF CIT-II VS. PRAYAS ENGINEERING LTD. IN TAX APPEAL NO.1237 OF 2014 AND THE DECISION OF THE ITAT, KOLKATA C BENCH IN THE CASE OF JAHANGIR BIRI FACTORY (P) LTD. V. DY. CIT [2009] 126 TTJ 567. 51. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. REVENUE IS AGGRIEVED WITH THE DELETION O F DISALLOWANCE OF RS.83,98,000/- BY LD. CIT(A), INCURRED TOWARDS COMM ISSION TO TWO DIRECTORS ON WHICH PROVISIONS OF SECTION 194H WERE ATTRACTED AND DISALLOWANCE WAS RIGHTLY MADE U/S 40(A)(IA). WE OBS ERVE THAT SALARY OF RS.7.22 LACS AND RS.7 LACS WERE PAID TO SHRI NIL ESH K. PATEL, CHAIRMAN AND SHRI NIMISH K. PATEL, MANAGING DIRECTO R OF THE COMPANY RESPECTIVELY. SIMILARLY, COMMISSION OF RS.4 1.99 LACS EACH WAS SHOWN TO THE CHAIRMAN AND MANAGING DIRECTOR. WE FURTHER OBSERVE THAT IN ANNEXURE-5 FORM NO.3CD ATTACHED TO THE TAX AUDIT REPORT FOR FY 2008-09 IN THE STATEMENT GIVING DETAI LS OF PAYMENTS ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 31 MADE TO PERSONS SPECIFIED U/S 40A(2)(B) OF THE ACT COMMISSION IS SHOWN TO DIRECTOR NILESH K. PATEL AND NIMISH K. PAT EL AT RS.41.99 LACS EACH AND DIRECTORS REMUNERATION IS SEPARATEL Y SHOWN AT RS.772,012/- AND RS 794,256 TO NILESH K. PATEL & NIMISH K. PATEL RESPECTIVELY. WE FURTHER OBSERVE THAT IN THE SAME A UDIT REPORT AND ANNEXURE-9 AUDITORS HAVE QUALIFIED THE REPORT OF ME NTIONING UNDER THE HEAD TAX DEDUCTIBLE BUT NOT DEDUCTED AT ALL WITH RE GARD TO PAYMENT OF COMMISSION OR BROKERAGE TO DIRECTORS U/S 192 OF THE ACT AT RS.4,297,530/- & RS.1,460,730/-. 52. NOW WE OBSERVE THAT THERE ARE TWO QUESTIONS WHI CH NEED TO BE ANSWERED (I) WHETHER COMMISSION OR BROKERAGE PAID TO CHAIRMA N/WHOLE TIME DIRECTOR IS PART OF SALARY ON WHICH TDS IS DEDUCTED U/S 192 OF THE ACT OR IT IS TO BE TREATED AS COMMISSION/BROKER AGE ON WHICH TDS IS DEDUCTIBLE U/S 194H OF THE ACT ? (II) WHETHER PROVISIONS OF SECTION 40(A)(IA) OF THE ACT ARE APPLICABLE FOR NON-DEDUCTION OF TDS U/S 194H? 53. NOW AS FAR AS QUESTION NO.1 IS CONCERNED, ISSUE HAS BEEN SETTLED BY THE CO-ORDINATE BENCH, KOLKATA IN THE CA SE OF JAHANGIR BIRI FACTORY (P) LTD. V. DY. CIT (SUPRA) WHEREIN IT HAS BEEN HELD THAT COMMISSION PAID TO THE DIRECTORS AS PER THEIR TERMS OF EMPLOYMENT FOR THE WORK DONE IN THEIR CAPACITY AS WHOLE TIME DIREC TORS SHOULD HAVE BEEN TREATED AS AN INCENTIVE IN ADDITION TO SALARY, BONUS AND OTHER PERQUISITES AND THEY DO NOT FALL UNDER THE PURVIEW OF SEC.194H OR 194J. IT IS TRUE THAT TAX IS DEDUCTIBLE ON SUCH COM MISSION AT THE RATE ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 32 PRESCRIBED U/S 192 OF THE ACT, SINCE SUCH COMMISSIO N IS NOTHING BUT PART OF SALARY AND THE APPELLANT HAS FAILED TO DEDU CT SUCH TAX. HOWEVER, PROVISIONS OF SEC.40(A)(IA) OF THE ACT DO NOT COVER EXPENDITURE SUBJECT TO TAX DEDUCTIBLE U/S 192 OF TH E ACT. WE ARE THEREFORE OF THE VIEW THAT THE IMPUGNED AMOUNT OF COMMISSION/BROKERAGE PAID TO DIRECTORS IS A PART OF SALARY AND REMUNERATION TO THE CHAIRMAN AND MANAGING DIRECTORS AND INCOME- TAX IS REQUIRED TO BE DEDUCTED AT SOURCE U/S 192 OF THE ACT. 54. NOW COMING TO QUESTION 2 WHETHER SECTION 40(A)( IA) OF THE ACT COVERS THE EXPENDITURE INCURRED ON SALARY OR NOT. N OW PROVISIONS OF SECTION 40(A)(IA) OF THE ACT READS AS UNDER :- 40. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SECTIONS 30 TO [ 38 ], THE FOLLOWING AMOUNTS SHALL NOT BE DEDUCTED IN COMPUTING THE INCO ME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION, ( A ) IN THE CASE OF ANY ASSESSEE [(I) ANY INTEREST (NOT BEING INTEREST ON A LOAN IS SUED FOR PUBLIC SUBSCRIPTION BEFORE THE 1ST DAY OF APRIL, 1938), ROYALTY, FEES F OR TECHNICAL SERVICES OR OTHER SUM CHARGEABLE UNDER THIS ACT, WHICH IS PAYAB LE, ( A ) OUTSIDE INDIA; OR ( B ) IN INDIA TO A NON-RESIDENT, NOT BEING A COMPANY O R TO A FOREIGN COMPANY, ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII-B AND SUCH TAX HAS NOT BEEN DEDUCTED OR, AFTER DEDUCTION, HAS NOT BEEN PAID [ DURING THE PREVIOUS YEAR, OR IN THE SUBSEQUENT YEAR BEFORE THE EXPIRY OF THE TIME PRESC RIBED UNDER SUB-SECTION (1) OF SECTION 200 ] : PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM, TAX HAS BEE N DEDUCTED IN ANY SUBSEQUENT YEAR OR, HAS BEEN DEDUCTED IN THE PREVIO US YEAR BUT PAID IN ANY SUBSEQUENT YEAR AFTER THE EXPIRY OF THE TIME PRESCR IBED UNDER SUB-SECTION (1) OF SECTION 200 , SUCH SUM SHALL BE ALLOWED AS A DEDUCTION IN COMPU TING THE INCOME OF THE PREVIOUS YEAR IN WHICH SUCH TAX HAS BEEN PAI D. THE FOLLOWING PROVISO SHALL BE SUBSTITUTED FOR THE EXISTING PROVISO TO SUB- CLAUSE ( I ) OF CLAUSE ( A ) OF SECTION 40 BY THE FINANCE (NO. 2) ACT, 2014, W.E.F 1-4-2015 : ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 33 PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM, TAX HAS BEEN DEDUCTED IN ANY SUBSEQUENT YEAR, OR HAS BEEN DEDUCTED DURING THE PR EVIOUS YEAR BUT PAID AFTER THE DUE DATE SPECIFIED IN SUB-SECTION (1) OF SECTION 139 , SUCH SUM SHALL BE ALLOWED AS A DEDUCTION IN COMPUTING THE INCOME O F THE PREVIOUS YEAR IN WHICH SUCH TAX HAS BEEN PAID. EXPLANATION.FOR THE PURPOSES OF THIS SUB-CLAUSE, ( A ) ROYALTY SHALL HAVE THE SAME MEANING AS IN EXPLA NATION 2 TO CLAUSE (VI) OF SUB-SECTION (1) OF SECTION 9 ; ( B ) FEES FOR TECHNICAL SERVICES SHALL HAVE THE SAME MEANING AS IN EXPLANATION 2 TO CLAUSE (VII) OF SUB-SECTION (1) OF SECTION 9 ; (IA) [ ANY INTEREST, COMMISSION OR BROKERAGE , [ RENT, ROYALTY, ] FEES FOR PROFESSIONAL SERVICES OR FEES FOR TECHNICAL SERVICES PAYABLE TO A RESIDENT, OR AMOUNTS PAYABLE TO A CONTRACTOR OR SUB-CONTRACTOR, BEING RESIDENT, FOR CARRYING OUT ANY WORK (INCLUDING SUPPLY OF LABOUR FOR CARRYING OUT ANY WO RK ) ] , ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII-B AND SUCH TAX HAS NOT BEEN DEDUCTED OR, AFTER DEDUCTION, [HAS NOT BEEN PAID 23A ON OR BEFORE THE DUE DATE 23A SPECIFIED IN SUB- SECTION (1) OF SECTION 139 :] [ PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM, TAX HAS BEE N DEDUCTED IN ANY SUBSEQUENT YEAR, OR HAS BEEN DEDUCTED DURING THE PR EVIOUS YEAR BUT PAID AFTER THE DUE DATE SPECIFIED IN SUB-SECTION (1) OF SECTION 139 , [ THIRTY PER CENT OF ] SUCH SUM SHALL BE ALLOWED AS A DEDUCTION IN COMPUTING THE IN COME OF THE PREVIOUS YEAR IN WHICH SUCH TAX HAS BEEN PAID :] [ PROVIDED FURTHER THAT WHERE AN ASSESSEE FAILS TO DEDUCT THE WHOLE O R ANY PART OF THE TAX IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER XVII-B ON ANY SUCH SUM BUT IS NOT DEEMED TO BE AN ASSESSEE IN DEFAULT UNDER THE FIRST PROVIS O TO SUB-SECTION (1) OF SECTION 201 , THEN, FOR THE PURPOSE OF THIS SUB-CLAUSE, IT SHALL BE DEE MED THAT THE ASSESSEE HAS DEDUCTED AND PAID THE TAX ON SUCH SUM ON THE DATE OF FURNISHING OF RETURN OF INCOME BY THE RESIDENT PAYEE REFERRED TO IN THE SAID PROVISO.] EXPLANATION.FOR THE PURPOSES OF THIS SUB-CLAUSE, ( I ) COMMISSION OR BROKERAGE SHALL HAVE THE SAME MEA NING AS IN CLAUSE (I) OF THE EXPLANATION TO SECTION 194H ; ( II ) FEES FOR TECHNICAL SERVICES SHALL HAVE THE SAME MEANING AS IN EXPLANATION 2 TO CLAUSE (VII) OF SUB-SECTION (1) OF SECTION 9 ; ( III ) PROFESSIONAL SERVICES SHALL HAVE THE SAME MEANI NG AS IN CLAUSE (A) OF THE EXPLANATION TO SECTION 194J ; ( IV ) WORK SHALL HAVE THE SAME MEANING AS IN EXPLANAT ION III TO SECTION 194C ; 27 [( V ) RENT SHALL HAVE THE SAME MEANING AS IN CLAUSE ( I ) TO THE EXPLANATION TO SECTION 194-I ; ( VI ) ROYALTY SHALL HAVE THE SAME MEANING AS IN EXPLANATION 2 TO CLAUSE ( VI ) OF SUB-SECTION (1) OF SECTION 9 ;] ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 34 55. FROM GOING THROUGH THE ABOVE PROVISIONS WE OBSE RVE THAT IT RELATES TO INTEREST, COMMISSION OR BROKERAGE, RENT, FEES FOR PROFESSIONAL AND TECHNICAL SERVICES PAYABLE TO CONT RACTOR OR SUB- CONTRACTOR BEING RESIDENT. WE FIND THAT THERE IS NO MENTION ABOUT THE PAYMENT OF SALARY IN THESE PROVISIONS. THEREFORE, W E ARE OF THE VIEW THAT PAYMENTS ON WHICH TAX IS DEDUCTIBLE UNDER SECT ION 192 OF THE ACT IS OUT OF THE AMBIT OF THE PROVISIONS OF SECTION 40 (A)(IA) OF THE ACT. 56. IN VIEW OF OUR ABOVE DISCUSSIONS AND IN THE GIV EN FACTS AND CIRCUMSTANCES OF THE CASE, WHERE THE ASSESSEE HAS D EDUCTED AND DEPOSITED THE PART OF TDS DURING THE YEAR AND THE R EMAINING IN THE FOLLOWING YEAR ON THE COMMISSION PAID TO WHOLE TIME DIRECTORS WHICH IS IN THE NATURE OF SALARY IS RIGHTLY SUBJECT TO TD S U/S 192 OF THE ACT AND NOT U/S 194H OF THE ACT AND, THEREFORE, NO DISA LLOWANCE IS CALLED FOR U/S 40(A)(IA) OF THE ACT ON THE SUM OF RS.83,98 ,000/-. NO INTERFERENCE IS CALLED FOR IN THE ORDER OF LD. CIT( A). THIS GROUND OF REVENUE IS DISMISSED. 57. GROUND NO.(III) OF REVENUES APPEAL III) THE ID. CIT (A) HAS ERRED IN LAW AND ON F ACTS IN DELETING THE DISALLOWANCE OF RS.91,07,505/- MADE ON ACCOUNT OF O N ACCOUNT OF INTEREST ON NON INTEREST BEARING ADVANCE. 58. DURING THE COURSE OF HIS EXAMINATION OF BOOKS O F ACCOUNT OF ASSESSEE ASSESSING OFFICER CAME ACROSS CERTAIN ADVA NCES ON WHICH NO INTEREST WAS CHARGED AND LD. ASSESSING OFFICER T REATED AS PRIMA FACIE CAUSE OF DIVERSION OF INTEREST BEARING FUNDS TO NON-INTEREST BEARING ADVANCES WHICH WAS IN RELATION TO 4 PARTIES NAMELY ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 35 N. K. INDUSTRIES 8400000 VIPUI INDUSTRIES 600000 GURU COMMODITIES 30000 PEARL ENERGY 77595 TOTAL 9107595 REPLY OF THE ASSESSEE WAS NOT FOUND SATISFACTORY AN D ASSESSING OFFICER WENT AHEAD TO MAKE DISALLOWANCE OF RS.91,07 ,595/-. ON APPEAL BEFORE LD. CIT(A) ASSESSEE GOT RELIEF AS LD. CIT(A) DELETED THE DISALLOWANCE BY OBSERVING AS BELOW :- 10.3 I HAVE CAREFULLY CONSIDERED RIVAL SUBMISSIONS. I HAVE ALSO PERUSED EVIDENCES FURNISHED BY THE APPELLANT AND THE CASE L AWS RELIED UPON BY THE ID. A.R. IT IS SEEN THAT INTEREST EXPENSES OF RS.91,07, 595/-WAS DISALLOWED U/S.36(1)(III) OF IT. ACT. AS PER THE PROVISIONS OF SECTION 36(1)(III), TO CLAIM INTEREST EXPENSES, FOLLOWING CONDITIONS SHOULD BE FULFILLED. (I) THE ASSESSEE MUST HAVE BORROWED MONEY (II) THE INTEREST SHOULD HAVE BEEN PAYABLE (III) BORROWING SHOULD BE MADE FOR THE PURPOSE O F BUSINESS. IN MY CONSIDERED VIEW, APPELLANT HAS FULFILLED ALL THE ABOVE CONDITIONS AND ACCORDINGLY IT IS ENTITLED TO CLAIM DEDUCTION U/S.3 6(1)(III) OF IT. ACT AGAINST INTEREST PAYMENT, PERUSAL OF THE ASSESSMENT ORDER REVEALS TH AT THE A.O. HAS NOT CHALLENGED BASIC ENABLING CONDITIONS AS LAID DOWN U /S.36(1)(III) FOR THE ALLOWANCE OF INTEREST. SINCE THE ENABLING CONDITIONS FOR ALLO WANCE OF INTEREST U/S.36(1)(III) ARE FULFILLED, ACCORDINGLY IN MY CONSIDERED VIEW DI SALLOWANCE OF INTEREST IS UNWARRANTED. 10.4 THE ONLY OBSERVATION MADE BY THE A.O. IS THAT THE ASSESSEE HAS NOT CHARGED INTEREST ON INTEREST FREE ADVANCE OF RS.13, 58,96,000/-[13,00,00,000/- + 50,00,000/- + 2,50,000/- + 64,60,000/-]. HOWEVER, T HE ACTION OF THE A.O. IS NOT TENABLE AS NON CHARGING OF INTEREST ON INTEREST FRE E ADVANCE CANNOT BE A REASON FOR DISALLOWANCE OF INTEREST. IT IS WELL SETTLED PR INCIPLE OF LAW THAT NON CHARGING OF INTEREST ON INTEREST FREE ADVANCES GIVEN BY THE ASS ESSEE CANNOT BY ITSELF, BE ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 36 SUFFICIENT GROUND FOR DISALLOWING INTEREST PAID BY THE ASSESSEE ON LOANS TAKEN BY IT. RELIANCE IN THIS REGARD IS PLACED ON FOLLOWING DECISIONS: (I) MEENAKSHI SYNTHETIC PVT. LTD. V/S.ACIT (2003) 8 4 ITD 563 (II) ACIT V/S. ARUNKUMAR GUPTA (2003) 78 TTJ 288 10.5 PERUSAL OF RECORDS FURTHER REVEALS THAT THE A. O. HAS NOT ESTABLISHED NEXUS BETWEEN INTEREST BEARING FUNDS AND LOANS WITH INTER EST FREE ADVANCES. IT IS HELD BY MUMBAI TRIBUNAL IN THE CASE OF OCEANIC INVESTMEN TS LTD. V/S. CIT (1997) 57 TTJ 549 THAT IT IS NECESSARY TO ESTABLISH NEXUS BET WEEN BORROWED FUNDS AND THE AMOUNT ADVANCED, AND IN THE ABSENCE OF THIS FINDING THE LOWER AUTHORITIES WERE NOT JUSTIFIED IN MAKING THE DISALLOWANCE OF INTERES T. IT WAS ALSO HELD IN THE CASE OF M/S.JAI SINGH'S SONS & CO. LTD. V/S. ITO (1977) 4 T TJ 1452 THAT INTEREST EXPENSES HAS TO BE ALLOWED AS THE A.O. HAS NOT ESTA BLISHED NEXUS BETWEEN BORROWINGS AND LENDINGS BY THE ASSESSEE COMPANY TO THE SUBSIDIARY COMPANY. FURTHER RELIANCE IN THIS REGARD IS PLACED ON THE FO LLOWING CASE LAWS:- (I) RAJ VIKAS QUARIES AND IND. P.LTD. V/S. ACIT (19 92) 42 TTJ 262 (II) UNITED AGENCIES V/S. ITO (1990) 37 TTJ 374 (AH D.) (III) CIT V/S.DHAMPUR SUGAR MILLS LTD. (2006) 148 T AXMAN 321 (ALL.) (IV) CIT V/S.RADICO KHAITAN LTD. 274 ITR 354 (ALL.) IN VIEW OF THE ABOVE DECISIONS, I HOLD THAT THE A.O . WAS NOT JUSTIFIED IN DISALLOWING INTEREST WITHOUT ESTABLISHING NEXUS BETWEEN INTERES T BEARING FUNDS AND INTEREST FREE FUNDS. 10.6 IT IS WELL SETTLED LAW THAT BURDEN IS ON THE R EVENUE TO PROVE THAT ANY PART OF BORROWED FUNDS WAS DIVERTED TO NON BUSINESS USE. RE LIANCE IN THIS REGARD IS PLACED ON THE FOLLOWING CASE LAWS: I) SHHADIRAM & SONS V/S. DCIT 92 ITD 22 II) MODIPON LTD. V/S.ITO 22 TTJ 108 III) JCIT V/S. STERISHEETS LTD. 106 TTJ 460 IT IS NOTICED THAT THE A.O. HAD MISERABLY FAILED TO DISCHARGE HIS ONUS AND FAILED TO PROVE THAT PART OF INTEREST BEARING FUND WAS DIVERT ED AS NON INTEREST BEARING FUNDS. 10.7 IT IS FURTHER SEEN THAT APPELLANT WAS HAVING I NTEREST FREE FUNDS OF RS. 49.02 CRORES (IN THE FORM OF PAID UP SHARE CAPITAL OF RS. 6.46 CRORES AND RESERVES & SURPLUS OF RS. 42,55 CRORES). THE A.O. HAS MENTIONE D THAT APPELLANT HAS MADE INTEREST FREE LOANS AND ADVANCES OF RS.13.58 CRORES . THUS, INTEREST FREE ADVANCES MADE IS MUCH BELOW THE INTEREST FREE FUNDS AVAILABLE WITH THE APPELLANT IN THE FORM OF PAID UP SHARE CAPITAL AND RESERVE & SURPLUS. IT IS HELD BY HON'BLE MUMBAI HIGH COURT IN RELIANCE UTILITIES AND POWER L TD. 313 ITR 340 THAT IF FUNDS ARE AVAILABLE, BOTH INTEREST FREE AND. INTEREST BEA RING, THEN A PRE ASSUMPTION ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 37 ARISE THAT INVESTMENTS ARE MADE OUT OF INTEREST FRE E FUNDS GENERATED OR AVAILABLE WITH THE ASSESSEE. IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET INVESTMENT, NO DISALLOWANCE OF INTEREST IS WARRANTED. RESPECTFU LLY FOLLOWING THE RATIO OF HON'BLE MUMBAI HIGH COURT DECISION IN THE CASE OF R ELIANCE UTILITIES & POWER LTD. I AM INCLINED TO AGREE WITH THE CONTENTIONS OF THE ID. A.R. 10.8 DURING THE APPELLATE PROCEEDINGS THE APPELLANT SUBMITTED THAT THE ADVANCE MADE TO M/S. N.K. INDUSTRIES LTD. OF RS. 13 CRORES WAS FOR BUSINESS PURPOSES. THE A.O. HAD CLEARLY MENTIONED THAT THE APPELLANT I S MAKING PURCHASES OF RS. 3 CRORES PER MONTH FROM THE ABOVE SAID COMPANY. IN VI EW OF THESE FACTS, I AM OF THE CONSIDERED VIEW THAT THE SAID ADVANCE IS A BUSI NESS ADVANCE AND ACCORDINGLY AS PER THE RATIO OF S.A. BUILDERS 288 I TR 1 (S.C.) INTEREST ON THESE ADVANCES CANNOT BE DISALLOWED AS PER THE PROVISIONS OF SEC.36(1)(III) OF THE I.T.ACT. 10.9 IN VIEW OF THE ABOVE, I AM INCLINED TO AGREE W ITH THE CONTENTIONS OF THE ID. A.R. ACCORDINGLY, DISALLOWANCE OF RS.91,07,595/- IS ORDERED TO BE DELETED. THIS GROUND OF APPEAL IS ALLOWED. 59. AGGRIEVED, REVENUE IS NOW IN APPEAL BEFORE THE TRIBUNAL. 60. LD. DR SUPPORTED THE ORDER OF LD. ASSESSING OFF ICER. 61. LD. AR SUBMITTED THAT DISALLOWANCE OF RS.91,07, 595/- IS IN RELATION TO 4 PARTIES OUT OF WHICH MAJOR DISALLOWAN CE OF RS.84 LACS RELATES TO M/S N. K. INDUSTRIES WITH WHOM ASSESSEE IS CARRYING OUT TRANSACTIONS ROUND THE YEAR WHICH RELATES TO PURCHA SE OF NON-EDIBLE OIL. AS THE TRANSACTION WITH N. K. INDUSTRIES ARE O F PURELY BUSINESS NATURE, NO DISALLOWANCE OF INTEREST WAS CALLED FOR ON THE ADVANCE GIVEN TO THIS PARTY. AS FAR AS OTHER THREE PARTIES NAMELY (I) VIPUL INDUSTRIES, (2) GURU COMMODITIES & (3) PERL ENERGY ARE CONCERNED THESE ADVANCES WERE GIVEN IN THE NORMAL COURSE OF B USINESS FOR THE PURPOSE OF BUSINESS IN THE PAST FOR COMMERCIAL EXPE DIENCY AND AS THE ASSESSEE HAS SUFFICIENT INTEREST FREE FUNDS NO DISALLOWANCE WAS ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 38 CALLED FOR U/S 36(1)(III) OF THE ACT. LD. AR PLACED RELIANCE ON THE JUDGMENT OF HON. GUJARAT HIGH COURT IN THE CASE OF CIT V. RAGHUVIR SYNTHETICS LTD.(2013) 354 ITR 222(GUJ) AND THAT OF HON. SUPREME COURT IN THE CASE OF HERO CYCLES P. LTD. VS. CIT(CE NTRAL), LUDHIANA 63 TAXMANN.COM 308 (SC). 62. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD AND GONE THROUGH THE JUDGMENTS RELIED ON BY LD. AR. IN THIS GROUND REVENUE HAS CHALLENGED THE ACTION OF LD. CIT (A) RELATING TO DELETION OF DISALLOWANCE OF RS.91,07,595/- MADE ON ACCOUNT OF INTEREST BEARING FUNDS AND NON-INTEREST BEARING ADV ANCES. THE ISSUE EMANATING IN THIS GROUND IS WITH REGARD TO ADVANCES IN THE NAME OF M/S N. K. INDUSTRIES, VIPUL INDUSTRIES, GURU COMMOD ITIES & PEARL ENERGY. AS PER LD. ASSESSING OFFICER IN THE CASE OF M/S N.K. INDUSTRIES THE OPENING DEBIT BALANCE WAS AT RS.6.42 CRORES (APPROX.) AND CLOSING DEBIT BALANCE WAS AT RS.13.78 CRORES AN D ROUND THE YEAR THE CLOSING BALANCE HAS NEVER COME BELOW APPROX. RS .10 CRORES AT THE END OF EVERY MONTH AND NO JUSTIFICATION WAS GIV EN FOR KEEPING THIS HEAVY ADVANCES TO THIS PARTY. HOWEVER, IN THE CASE OF VIPUL INDUSTRIES TO WHICH SUM OF RS.50 LACS HAS BEEN SHOWN AS DEPOSI T AND WAS RECEIVED BACK IN THE SUBSEQUENT YEAR AND IN THE CAS E OF GURU COMMODITIES AND PEARL ENERGY OLD ADVANCES OF RS.2.5 0 LACS AND RS.646627/- WERE GIVEN SINCE ABOUT 15 YEARS AGO. 63. WE FIND THAT ASSESSEE COMPANY IS DEALING WITH E DIBLE OIL AND NON-EDIBLE OIL AND THE GROSS TURNOVER OF RS.1478.7 CRORES AND PROFIT BEFORE TAXES AT RS.13.49 CRORES. WE FURTHER OBSERVE THAT RESERVE AND ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 39 SURPLUS OF RS.42.56 CRORES STOOD ALONG WITH 6.47 CR ORES AS CAPITAL AS ON 31/3/2008. WE ALSO OBSERVE THAT TOTAL OF SHARE C APITAL RESERVE AND SURPLUS AT RS.49.03 CRORES IS ALMOST 3 TIMES OF LOA N FUNDS OF RS.15.36 CRORES. THE REASON FOR OBSERVING THESE FINANCIAL DA TAS ARE TO ANALYSE THAT ASSESSEE COMPANY IS HAVING HUGE TURNOVER, HEAV Y PROFITS, SUFFICIENT CAPITAL BASIS AND AVAILABILITY OF INTERE ST-FREE FUNDS. FURTHER WE FIND THAT THERE IS NO DISPUTE TO THE BASIC FINAN ANCIAL RESULTS I.E. GP OR NP OF THE COMPANY AND AUDITED BOOKS OF ACCOUNT H AVE BEEN ACCEPTED BY THE REVENUE. NOW AS FAR AS M/S N. K. IN DUSTRIES IS CONCERNED, WE FIND THAT ASSESSEE IS REGULARLY PURCH ASING NON-EDIBLE OIL ON EXCLUSIVE BASIS AND IF WE ANALYSE THE ADVANC ES STANDING AT THE END OF THE MONTH WITH THE MONTHLY SALES OF THE ASSE SSEE COMPANY, WE FIND THAT THE MONTHLY SALES OF THE COMPANY ARE A PPROX. RS.120 CRORES AND THE CLOSING BALANCE OF M/S N. K.INDUS. I S APPROX. RS.10 CRORES. THESE TRANSACTIONS ARE UNDOUBTEDLY BUSINESS TRANSACTIONS AND THERE IS NO EVIDENCE ON RECORD TO SHOW THAT THE SE ARE INTEREST FREE ADVANCES. THESE ARE PURELY BUSINESS ADVANCES A ND PROFIT EARNING COMPANY IN THE REGULAR COURSE OF BUSINESS A ND FOR COMMERCIAL EXPEDIENCY HAS TO KEEP FUNDS ADVANCED TO THE SUPPLIER OF RAW MATERIAL TO HAVE UNINTERRUPTED SUPPLY OF QUA LITY GOODS. WE ARE OF THE VIEW THAT LD. ASSESSING OFFICER WAS NOT JUS TIFIED IN MAKING DISALLOWANCE OF RS.84 LACS ON THE ADVANCES TO M/S N .K. INDUSTRIES. AS FAR AS ADVANCES OF RS.50 LACS TO VIPUL INDUSTRIE S IS CONCERNED WHICH HAS BEEN SETTLED IN THE SUBSEQUENT YEAR SEEMS TO BE A NORMAL BUSINESS ADVANCE LOOKING TO THE OVER ALL FINANCIAL VOLUME OF ASSESSEE COMPANY AND DO NOT CALL FOR ANY DISALLOWANCE OF INT EREST. SIMILARLY IN THE CASE OF GURU COMMODITIES AND PEARL ENERGY CALLI NG DEBIT ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 40 BALANCES OF RS. 25000/- AND RS.646627/- ARE ALSO OL D ADVANCES AND REVENUE HAS ALSO NOT BROUGHT ON RECORD ANY EVIDENCE TO PROVE THAT THESE ARE NON-BUSINESS ADVANCES, WE ARE OF THE VIEW THAT IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE WHERE ASS ESSEE HAS SUFFICIENT INTEREST FREE FUNDS, LIQUID FUNDS AND PR OFIT EARNING BUSINESS, THESE ADVANCES HAVE BEEN MADE IN THE REGULAR COURSE OF BUSINESS FOR COMMERCIAL EXPEDIENCY. ACCORDINGLY, NO DISALLOW ANCE WAS CALLED FOR RS.91,07,595/- ON ACCOUNT OF INTEREST EXPENDITU RE U/S 36(1)(III) OF THE ACT AS THE ADVANCES WERE FOR BUSINESS PURPOSES, COMMERCIAL EXPEDIENCY AND NO NEXUS BEING PROVED BY THE REVENUE FOR ACTUAL DIVERSION OF INTEREST BEARING FUNDS TO NON-INTEREST BEARING ADVANCES. NO INTERFERENCE IS CALLED FOR IN THE ORDER OF LD. C IT(A). IN THE RESULT, APPEAL OF REVENUE IS DISMISSED. 63. GROUND NO.(IV) & (V) OF REVENUES APPEAL ARE GE NERAL IN NATURE, HENCE NO ADJUDICATION IS REQUIRED. 64. IN THE RESULT, APPEAL OF ASSESSEE IS PARTLY ALL OWED FOR STATISTICAL PURPOSES AND THE APPEAL OF REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH JULY, 2016 SD/- SD/- (RAJPAL YADAV) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER DATED 27/7/2016 MAHATA/- ITA NO. 1986 & 2133/AHD/2012 ASST. YEAR 2009-10 41 COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, AHMEDABAD 1. DATE OF DICTATION: 22-25/07/2016 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: 26/07/2016 OTHER MEMBER: 3. DATE ON WHICH APPROVED DRAFT COMES TO THE SR. P. S./P.S.: 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: __________ 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S./P.S.: 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK: 27/7/2016 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK: 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: 9. DATE OF DESPATCH OF THE ORDER: